2018 annual report...air canada’s unit costs, or cost per available seat mile (casm), increased...

2018 ANNUAL REPORT

2018 ANNUAL REPORT | Management’s Discussion and Analysis of Results of Operations and Financial Condition

1. HIGHLIGHTS

The financial and operating highlights for Air Canada for the periods indicated are as follows:

(Canadian dollars in millions, except where indicated)

Fourth Quarter Full Year

2018 2017 (1) $ Change 2018 2017 (1) $ Change

Financial Performance MetricsOperating revenues 4,246 3,820 426 18,065 16,252 1,813 Operating income 122 133 (11) 1,174 1,371 (197)Income (loss) before income taxes (216) 20 (236) 405 1,286 (881)Net income (loss) (231) 8 (239) 167 2,029 (1,862)Adjusted pre-tax income (2) 68 77 (9) 952 1,165 (213)Adjusted net income (2) 54 60 (6) 677 1,145 (468)Operating margin % 2.9% 3.5% (0.6) pp 6.5% 8.4% (1.9) ppEBITDAR (excluding special items) (2) 543 521 22 2,851 2,928 (77)EBITDAR margin (excluding special items) % (2) 12.8% 13.6% (0.8) pp 15.8% 18.0% (2.2) ppUnrestricted liquidity (3) 5,725 4,181 1,544 5,725 4,181 1,544Net cash flows from operating activities 360 389 (29) 2,695 2,738 (43)Free cash flow (2) 141 (43) 184 791 1,056 (265)Adjusted net debt (2) 5,858 6,116 (258) 5,858 6,116 (258)Return on invested capital (“ROIC”) % (2) 12.6% 15.3% (2.7) pp 12.6% 15.3% (2.7) ppLeverage ratio (2) 2.1 2.1 - 2.1 2.1 -Diluted earnings per share $ (0.85) $ 0.02 $ (0.87) $ 0.60 $ 7.31 $ (6.71)Adjusted earnings per share – diluted (2) $ 0.20 $ 0.22 $ (0.02) $ 2.45 $ 4.11 $ (1.66)

Operating Statistics (4) % Change % Change

Revenue passenger miles (“RPM”) (millions) 20,801 19,396 7.2 92,360 85,137 8.5 Available seat miles (“ASM”) (millions) 25,598 24,191 5.8 110,866 103,492 7.1 Passenger load factor % 81.3% 80.2% 1.1 pp 83.3% 82.3% 1.0 pp Passenger revenue per RPM (“Yield”) (cents) 18.2 17.6 3.8 17.6 17.1 2.5 Passenger revenue per ASM (“PRASM”) (cents) 14.8 14.1 5.2 14.6 14.1 3.8 Operating revenue per ASM (cents) 16.6 15.8 5.1 16.3 15.7 3.8 Operating expense per ASM (“CASM”) (cents) 16.1 15.2 5.7 15.2 14.4 6.0 Adjusted CASM (cents) (2) 11.4 11.3 0.5 10.6 10.6 0.3

Average number of full-time equivalent (“FTE”) employees (thousands) (5) 30.5 28.3 7.6 29.9 27.8 7.4

Aircraft in operating fleet at period-end 400 395 1.3 400 395 1.3Average fleet utilization (hours per day) 9.7 9.7 (0.1) 10.4 10.4 0.1 Seats dispatched (thousands) 15,185 14,522 4.6 63,800 60,820 4.9 Aircraft frequencies (thousands) 137.7 138.4 (0.5) 578.9 569.6 1.6 Average stage length (miles) (6) 1,686 1,666 1.2 1,738 1,702 2.1 Fuel cost per litre (cents) 84.3 67.5 24.8 80.4 62.6 28.4 Fuel litres (thousands) 1,293,063 1,254,111 3.1 5,597,232 5,331,888 5.0Revenue passengers carried (thousands) (7) 11,909 11,314 5.3 50,904 48,126 5.8

(1) Air Canada adopted accounting standard IFRS 15 - Revenue from Contracts with Customers effective January 1, 2018 with restatement of 2017 amounts.

(2) Adjusted pre-tax income, adjusted net income, adjusted earnings per share – diluted, EBITDAR (earnings before interest, taxes, depreciation, amortization, impairment and aircraft rent), EBITDAR margin, leverage ratio, free cash flow, ROIC and adjusted CASM are each non-GAAP financial measures and adjusted net debt is an additional GAAP measure. Refer to sections 8 and 20 of Air Canada’s 2018 MD&A for descriptions of Air Canada’s non-GAAP financial measures and additional GAAP measures. As referenced in the table above, special items are excluded from Air Canada’s reported EBITDAR calculations. Refer to section 6 of Air Canada’s 2018 MD&A for information on the special items.

(3) Unrestricted liquidity refers to the sum of cash, cash equivalents and short-term investments and the amount of available credit under Air Canada’s revolving credit facilities. At December 31, 2018, unrestricted liquidity was comprised of cash, cash equivalents and short-term investments of $4,707 million and undrawn lines of credit of $1,018 million. At December 31, 2017, unrestricted liquidity was comprised of cash, cash equivalents and short-term investments of $3,804 million and undrawn lines of credit of $377 million.

(4) Except for the reference to average number of FTE employees, operating statistics in this table include third party carriers (such as Jazz Aviation LP (“Jazz”), Sky Regional Airlines Inc. (“Sky Regional”), Air Georgian Limited (“Air Georgian”) and Exploits Valley Air Services Ltd. (“EVAS”)) operating under capacity purchase agreements with Air Canada.

(5) Reflects FTE employees at Air Canada. Excludes FTE employees at third party carriers (such as Jazz, Sky Regional, Air Georgian and EVAS) operating under capacity purchase agreements with Air Canada.

(6) Average stage length is calculated by dividing the total number of available seat miles by the total number of seats dispatched.

(7) Revenue passengers are counted on a flight number basis (rather than by journey/itinerary or by leg) which is consistent with the IATA definition of revenue passengers carried.

2018 ANNUAL REPORT

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CONTENTS

MessagefromthePresidentandChiefExecutiveOfficer 4AirCanada2018CorporateSustainabilityProgressReport 8

2018 Management’s Discussion and Analysis of Results of Operations and Financial Condition 141. Highlights 22. IntroductionandKeyAssumptions 153. AboutAirCanada 174. Strategy 185. Overview 276. ResultsofOperations–FullYear2018versusFullYear2017 297. ResultsofOperations–FourthQuarter2018versusFourthQuarter2017 378. Fleet 489. FinancialandCapitalManagement 51

9.1.Liquidity 519.2.FinancialPosition 519.3.AdjustedNetDebt 529.4.WorkingCapital 539.5ConsolidatedCashFlowMovements 549.6.CapitalExpendituresandRelatedFinancingArrangements 559.7.PensionFundingObligations 579.8.ContractualObligations 589.9.ShareInformation 59

10.QuarterlyFinancialData 6011.SelectedAnnualInformation 6312.FinancialInstrumentsandRiskManagement 6413.CriticalAccountingEstimatesandJudgements 6714.AccountingPolicies 7115.Off-BalanceSheetArrangements 7416.RelatedPartyTransactions 7417. SensitivityofResults 7518.RiskFactors 7619.ControlsandProcedures 8720.Non-GAAPFinancialMeasures 8821.Glossary 94

2018 Consolidated Financial Statements and Notes 96StatementofManagement’sResponsibilityforFinancialReporting 97IndependentAuditor’sReport 98ConsolidatedStatementsofFinancialPosition 100ConsolidatedStatementsofOperations 101ConsolidatedStatementsofComprehensiveIncome 102ConsolidatedStatementsofChangesInEquity 102ConsolidatedStatementsofCashFlow 1031. GeneralInformation 1042. BasisofPresentationandSummaryofSignificantAccountingPolicies 1053. CriticalAccountingEstimatesandJudgements 1174. PropertyandEquipment 1195. IntangibleAssets 1206. Goodwill 1217. Long-TermDebtandFinanceLeases 1228. PensionsandOtherBenefitLiabilities 1269. ProvisionsforOtherLiabilities 13510.IncomeTaxes 13611.ShareCapital 13912.Share-BasedCompensation 14113.EarningsperShare 14414.Commitments 14515.FinancialInstrumentsandRiskManagement 14616.Contingencies,GuaranteesandIndemnities 15317. CapitalDisclosures 15518.Revenue 15619.RegionalAirlinesExpense 15820.SpecialItems 15821.Sale-Leaseback 15822.RelatedPartyTransactions 15823.SubsequentEvents 159Directors 160Officers 161InvestorandShareholderInformation 165

2018 ANNUAL REPORT

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MESSAGE FROM THE PRESIDENT AND CHIEF EXECUTIVE OFFICER

AirCanada’sstrongexecutioncapabilitieswereonfulldisplayin2018giventhemanychallengesfacedduringtheyear,includingsignificantlyhigherfuelcostsandeconomicandtradeuncertainty.Theresultsachieved,includingastrengthenedbalancesheetandanexpandedglobalfranchise,demonstratedbothresiliencyandconsistency.AirCanadasharesoutperformedindustrypeersaswellastheTSXCompositeIndex,andtheyhavenowreturnedmorethan4,000%sincewefirstsetabouttotransformourselvesadecadeago.

Wegeneratedrecordoperatingrevenueof$18.065billionin2018andendedtheyearwithrecordunrestrictedliquidityof$5.725billion.Followingonarecordyearin2017,wereportedacomparablysolidperformanceonotherkeymetrics,suchasEBITDARof$2.851billion(includingrecordfourthquarterEBITDARof$543million),operatingincomeof$1.174billion,netcashfromoperatingactivitiesof$2.695billionand$791millionfreecashflow.

Successinanygivenyeardependsonmanythingsgoingright.Inthisregard,our2018recordrevenuereflectedyear-over-yearincreasesinpassengerrevenueinallmarketsweserve.Thisunderscoresboththestrengthofournetworkandahighlyefficientfleetdeploymentacrossthatnetwork.

Toputthisinperspective,wehaveachievednineconsecutiveyearsofrevenuegrowth.Our2018passengerrevenuewas$16.2billion,an11.2%increaseover2017.

Thisrevenuegrowthwasalsoaccompaniedbystrictcostdisciplinewithincontrollablecostcategories.In2018,AirCanada’sunitcosts,orcostperavailableseatmile(CASM),increased6.0%comparedto2017,mostlyattributabletoanincreaseinfuelcostsofalmost$1.2billion.AdjustedCASM,whichexcludesfuelexpense,thecostofgroundpackagesatAirCanadaVacationsandspecialitems,increasedonly0.3%,inlinewithourprojections.

Ourfreecashflowof$791millionin2018wassignificantlyaboveguidance.Adjustednetdebtof$5.858billionwasdown$258millionfromtheprioryearasanincreaseinlong-termdebtandfinanceleaseswasmorethanoffsetbyanincreaseincash,cashequivalentsandshort-terminvestments.Thecompany’sleverageratioof2.1wasunchangedfromDecember31,2017.Ourweightedaveragecostofcapitalstoodat7.2%atyear-end,540basispointslowerthanourreturnoninvestedcapitalof12.6%,resultingincontinuedvaluecreation.

Anotherimportantrecordfortheyearwasthenumberofcustomerscarried.Weflew50.9millionpassengers,anincreaseof5.8%from2017,withanaverageloadfactorof83.3%.Tocontextualizethesenumbers,lookingbackintoourpast,ittookus30yearstoflyourfirst50millioncustomers.

Moreimportantly,wecarriedourcustomerssafelyanddidsowithincreasedlevelsofcustomercareasthenumerousawardswewereprivilegedtoreceivein2018attest.Forthesecondyearinarowandtheseventhtimeinnineyears,SkytraxnamedusNorthAmerica’sBestAirlineandweremaintheonlyfour-starinternationalnetworkcarrierinNorthAmerica.Weachievedafive-starratingforouronboard

CalinRovinescu

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Air Canada shares outperformed industry peers as well as the TSX Composite Index, and they have now returned more than 4,000% since we first set about to transform ourselves a decade ago.

customerexperiencefromtheAirlinePassengerExperienceAssociation.Aswell,wecontinuetoleadintheall-important,higher-yieldingmarketsegmentoffrequentbusinesstravellers,whereAirCanadaisthepreferredairlinefordomestictravelfor92%ofthispopulation,accordingtotheIpsosReid2018CanadianBusinessTravellerSurvey.

ResultssuchasthesespeaktotheextentofthetransformationAirCanadahasundergone;onewearecommittedtopursueevenmorevigorouslyintothefuture,aswecontinuetoadheretothefourcorporateprioritiesthathavebroughtustothispoint.

ThefirstoftheseisRevenueEnhancementandCostControl.Notonlyhavewesuccessfullygrownrevenue,butthemake-upofthatrevenuehasalsogreatlyimproved.Onastage-lengthadjustedbasis,in2018,systemyieldincreased3.7%andPRASMimproved5%over2017.Wehavedonethisbyattractingagreatershareofbusinessandpremiumcustomersaswellasthroughaneffectiveancillaryfeestrategy,whichresultedina13%increaseinsuchrevenueover2017.

Asmentioned,thecounterparttorevenuegenerationiscostcontrol.Ourabilitytocontainunitcostsbelowourforecastisevidenceofacostdisciplinenowengrainedthroughoutourcompany.Today,onalocalcurrencybasis,weoperateatthesameadjustedCASMlevelonaverageasourmuchlargerU.S.competitors,whichshouldfurtherreducethevaluationdiscountourcompanyhaslongbeensubjecttoversusourU.S.peers.

Weanticipatefurthercostreductions.Already,atyear-end,wehadachievedoridentified$220millionof$250millioninannualsavingstargetedinatwo-yearCostTransformationProgramwhichbeganin2018.AirCanadaRouge,withits29%loweradjustedCASMcomparedtoAirCanadamainline,continuestoexpandinleisuremarketsanddomesticallyonrouteswherewefacelow-costcarriercompetition.

OurfleetrenewalhasalsobeenakeydriverforCASMreductions.In2018,wetookdeliveryoffiveBoeing787-9and16Boeing737MAX8aircraftintothemainlinefleetandaddedoneAirbusA321,twoAirbusA319sandoneBoeing767aircrafttotheAirCanadaRougefleet.AllofthesenewfleettypeshavebeendesignedtoproducesignificantCASMsavingsovertheaircrafttheywillreplace.

Wehavestructuredourfleetrenewalprogramtostrengthenourbalancesheet.Atpresent,55aircraft,or23%ofourcombinedmainline/Rougefleet,areunencumbered,creatingapoolofassetsvaluedatUS$2.6billionthatwecanmonetizeifneeded.Thisassetpoolwillincreaseasweexpecttohavecloseto100oralmost40%ofourcombinedmainline/Rougefleetunencumberedbytheendof2021.

FleetrenewalhasalsosupportedoursecondpriorityofInternationalExpansion.During2018,AirCanadaandAirCanadaRougelaunched29newroutes,mostlyinternationalandtransborder.Withourwide-bodyfleetrenewallargelycompleted,thepaceofcapacitygrowthwilltaperbutwewillcontinuetoaddnewinternationalrouteswheremarginsarehigherandtofurtherdiversifyandde-riskournetwork.

Anequallyimportantconsiderationiseachnewroute’spotentialtodrawincrementalinternational-connectingtrafficthroughourhubs.Insupportofthis,weundertookseveralprojectsin2018

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tostreamlineairportconnectionprocesses,notablywithnewmeasurestosaveconnectingandtransitingcustomerssignificanttimeoncustomsandbaggageretrieval.Theseeffortsarebearingfruit,asoverthelastfiveyearswehavegrownsuchconnectingtrafficby142%.

Weaugmentournetworkthroughclosepartnershipswithothercarriers,notablythe28-memberStarAlliance.Beyondthis,AirCanadabelongstotwoimportantjointventures,onewithUnitedAirlinesandtheLufthansagroupofairlinesandasecondcompletedin2018withAirChina.ThelatteristhefirstjointventurebetweenaChineseandNorthAmericancarrieranditgivesusafirstmoveradvantageinthegrowingChineseairtransportmarket,whichisexpectedtobecometheworld’slargestby2022.

OurmodernfleetandexpansivenetworkareessentialtoourthirdpriorityofCustomerEngagement.Alongwithinvestinginaircraft,wehavedevotedconsiderableresourcestotraining,onboardamenitiesandtheairportenvironment.Amilestoneachievementin2018wasthelaunchofAirCanadaSignatureService,providingsuperiorcurb-to-curbservicesforPremiumcustomerstravellinginternationallyandonselecttranscontinentalitineraries.OtherinnovationsincludedtheexpansionofonboardconnectivitytointernationalflightsandtheopeningofthreenewMapleLeafLounges.

Duringtheyear,wecontinuedtoworkontwomajorinitiativesthatwillfurtherspurcustomerengagement.Oneoftheseisthedevelopmentofournewloyaltyprogram,whichtookaquantumleapin2018whenAirCanadareachedanagreementtoacquireAeroplanandenteredintoco-brandedcreditcardagreementswithTD,CIBC,Visaand,afteryear-end,theAmexBankofCanada.ThosetransactionswillsmooththetransitionofmorethanfivemillionactiveAeroplanmemberstoAirCanada’snewprogramwhenitlaunchesin2020.Moreimmediately,itbringsawealthoftalent,technologyanddata,significantlyde-riskingthenewprogram’slaunch.

Asecondmajorcustomerserviceinitiativeisthereplacementofourdecades-oldreservationsystembyanewpassengerservicesystem.Afteritgoesintoservicelaterin2019,itwillmodernizeoursystemsforreservations,inventoryanddeparturecontrol,andallowAirCanadatooptimizeitsflightschedulebyprovidingtheabilitytomoreeasilymanageinventorybetweenanygivenoriginanddestination.Forcustomers,onekeybenefitisthatitwillautomaterebookingsduringflightdisruptions,suchasthosecausedbyextremeweather.

Thenewreservationsystem,bygivingemployeessuperiortoolstoassistcustomers,willalsosignificantlyadvanceourfourthpriorityofCultureChange.Whilestrongfinancesmakeourtransformationpossible,itisouremployeeswhomostimmediatelyeffectchangeandcarrythroughAirCanada’stransformation.Itistheirday-to-dayinteractionswithourcustomersandtheirabilitytotakeever-bettercareofthemthatultimatelydeterminesthesuccessofourcompany.

ThestrengthofAirCanada’scultureiswidelyrecognizedthroughourunprecedented,long-termlabouragreementsthatprovidestabilityandcommonpurposeforallemployeegroups.Forthesixthyearinarow,wehavebeenrankedamongCanada’sTop100employersandduring2018wereceivedotherawards,

During the year, we continued to work on two major initiatives that will further spur customer engagement. One of these is the development of our new loyalty program, which took a quantum leap in 2018 when Air Canada reached an agreement to acquire Aeroplan and entered into co-branded credit card agreements with TD, CIBC, Visa and, after year-end, the Amex Bank of Canada.

2018 ANNUAL REPORT

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includingOneofCanada’sMostAttractiveEmployers,Oneofthe50MostEngagedWorkplaces,andwewereratedfifthintheTop20EmployerBrandsinCanada.

Anothersignificantrecognitionfrom2018thatweareproudofandbearsonemployeeengagementistheEco-AirlineoftheYearAwardfromAir Transport World.Studiesshowthat,increasingly,people,particularlymillennials,optforcareerswithcompaniesthatactresponsibly.Thisawardhelpsfurtherourrecruitment,retentionandengagementefforts,nottomentionalsoappealingtocustomerswhoquiteproperlydemandresponsiblebehaviourandsustainabilitycommitmentsfromcorporations.

Ithasbeen10yearsnowsinceAirCanadafirstundertooktorepairabadlybrokenbusinessmodelwiththeaimoftransformingitselfintoaglobalchampionthatwouldbesustainablyprofitableoverthelong-term.Our2018performance,followingonrecordresultsofrecentyears,canleavenodoubtthatweareachievingtheseambitiousgoals.

However,wearealsocognizantthatourindustrycontinuouslyevolvesandthatourcompetitionneverrests,sowealsoviewallwehaveachievedasapreludetothenextchapter.TheresiliencyofAirCanada,asshownbyits2018resultsrelativetoitspeers,anditsnowwell-establishedtrackrecordofdeliveringonitscommitments,givesuseveryconfidenceofcontinuedsuccess.

BackstoppingthisconfidenceistheunwaveringsupportwehavereceivedfromourBoardofDirectorsandshareholdersduringeverystepofourjourney.IamdeeplyappreciativeoftheguidanceprovidedbyourBoardofDirectorsandthelong-termcommitmentinvestorshavemade,astogetherweprogresstowardourever-closergoalofaninvestmentgraderating.

Finally,Ialsothankthe30,000employeesofAirCanada,whohavesowhollyembracedchangeinarapidlyevolvinglandscapethattheynowoccupyaleadershiproleintheglobalindustry.Aswell,IalsothankourcustomersandassurethemthatallofusatAirCanadaarefullycommittedtoearningtheirloyaltyeverydaybycontinuingtotransportthemsafelywiththeutmostofcareandclass.

It has been 10 years now since Air Canada first undertook to repair a badly broken business model with the aim of transforming itself into a global champion that would be sustainably profitable over the long-term. Our 2018 performance, following on record results of recent years, can leave no doubt that we are achieving these ambitious goals.

Calin Rovinescu PresidentandChiefExecutiveOfficer

March1,2019

Air Canada is committed to conducting its business sustainably and responsibly. To further this objective, the environmental, social and economic aspects of sustainability are integrated into its business and operations.

In 2018, Air Canada undertook a materiality assessment to identify the main sustainability areas of focus of its key stakeholders, defined as investors, customers, employees and suppliers.

Citizens of the World

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CORPORATE SUSTAINABILITY: 2018 PROGRESS REPORT

Inaddition,aCorporateSustainabilityWorkingGrouptaskedwiththemonitoringandcoordinatingofAirCanada’scorporatesustainabilityinitiativeswasformed.ThegroupiscomprisedofAirCanadaseniormanagementsubject-matterexpertsfromdiversefunctions,includingEnvironmentalAffairs,HealthandSafety,StrategicProcurement,Legal,CommunicationsandCommunityPartnerships,aswellasBrand,InvestorRelationsandRiskAdvisory.TheWorkingGroupreportsonAirCanada’ssustainabilityperformanceandmakesrecommendationstoaCorporateSustainabilitySteeringCommittee,whichincludesseveralAirCanadaExecutives.

AfulsomediscussionofAirCanada’scorporatesustainabilityperformance,awardsandgoalswillbeavailableinthecompany’sforthcomingCorporateSustainabilityReportthatwillbeavailableonlineataircanada.com.

Thereportcontinuestobeanchoredonfourpillars:(i)safety;(ii)environment;(iii)employees;and(iv)thecommunities.

Sustainable governance

Transparency and disclosure

Ethical business practices and policies

Economic performance of Air Canada

Fleet management

Sustainable procurement practices

Safety

Data protection and privacy

Labour relations and employee engagement

Employee training & development

Community involvement

Diversity and equal opportunityCorporate citizenship

Employee health and wellness

Human rights

Socio-economicimpact in Canada

Customer engagement

Energy consumptionWaste management

Water management

Greenhouse gas (GHG) emissions

Biodiversity

Management of climate-relatedrisks and opportunities

Noise

IMPO

RTA

NC

E TO

STA

KEH

OLD

ERS

Sustainable governance

Transparency and disclosure

Ethical business practices and policies

Economic performance of Air Canada Fleet managementSafety

Data protection and privacy

Labour relations and employee engagementCustomer engagementEnergy consumption

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1059

IMPORTANCE TO AIR CANADA’S BUSINESS

ENVIRONMENTALSOCIALECONOMICGOVERNANCE

TOP 5 ISSUES

TOP 10 ISSUES

RESULTS OF STAKEHOLDER ANALYSIS CONDUCTED IN 2018Air Canada’s Materiality Matrix


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SAFETY

ü ProvidedemployeeswithanupdatedAlcoholandDrugPolicytolendguidanceandmanagetherisksassociatedwiththelegalizationofcannabis.

ü SuccessfullyimplementedaMulti-FactorAuthenticatorpilotprogramtobetterprotectemployee,customerandcompanydata,reducingexposuretocyber-risk.

ü Conductedaprivacymaturityassessmenttohelpdriveitseffortsinprotectingemployeeandcustomerdata.

ENVIRONMENT

ü Recognizedasthe2018Eco-AirlineoftheYearbyAir Transport World.

ü AchievedIATAEnvironmentalAssessment(IEnvA)Certification,Phase1.

ü Exceededthecollectivefuelefficiencytargetsof1.5%setfortheairlineindustry.

ü Continuedtomodernizeitsfleettowardsimprovedfuelefficiencywiththeadditionof16Boeing737MAXandfiveBoeing787aircraft.

ü Contributedtosaving160tonnesofcarbonemissionson22domesticflightsforEarthDaythroughCanada’sBiojetSupplyChainInitiative(CBSCI),aninnovativebiojetfuelresearchprojectfundedthroughtheGreenAviationResearch&DevelopmentNetwork(GARDN),developingexperience-basedknowledgewithbiojetintegrationinco-mingledfuellingsystemsatCanadianairports.Astheonlycommercialairlinepartner,AirCanadasourcedandintegrated230,000litresofsustainablebiojetfuelintoPearsonInternationalAirport’smulti-userfuelsupplysystem.

ü Operated,inpartnershipwiththeEdmontonAirportAuthority,abiofueltrademissionflightonMay2,2018—AirCanada’seighthbiofuelflightsince2012.

ü Continuedtoadvanceitsnewliverydeploymentwithaleadingtechnologypaintsystemknownasbasecoatclearcoat(BCCC)system.Thisliverysystemcontainsnochrome,leadorotherheavymetalsandrequireslesslayersofpaint,enablingoperationalefficiencies,reducingweightandreducingtheoverallcarbonfootprint.

The following is an overview of Air Canada’s key social and environmental performance achievements in 2018:


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EMPLOYEES

ü RecognizedasoneofCanada’sTop100EmployersandCanada’sBestDiversityemployers,andnamedoneofthetopfivemostattractivecompanybrandstoworkforinCanadaandoneofMontréal’sTopEmployers.

ü EnhancedtheEmergingLeadersProgram,acorporatecareerdevelopmentprogramformanagers.

ü ImplementedBuy-TimetoRetirementandReducedWorkWeekprogramsforsenioremployeestotransitiontoretirement,whileenablingthetransferofexpertisetotheircolleagues.

ü MarkedInternationalWomen’sDay2018byoperatingtwointercontinentalflightswithall-femalestaff,fromgroundhandlers,tocheck-in,topilotsandflightattendants,andwelcomedyoungwomenconsideringemploymentinaviationduringYoungWomeninAviationDay.

ü CelebratedPride,engaginginfivememorableparadesandothereventsforitsemployeesandthecommunity.


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COMMUNITIES

ü Established150communitypartnerships,suchasthosefocusedonthediversityoftheLGBTQ2+communityinCanada,theRendez-vousdelaFrancophonie,theVimyFoundation,andtheIndspireAwards—thelatterdesignedtorecognizethetremendouscontributionsthatIndigenousPeoplearemakingacrossthecountry.

ü TheAirCanadaFoundationgrantedfinancialandin-kindsupportto275Canadianregisteredcharitiesfocusedonthehealthandwell-beingofchildrenandyouthandprovidedassistancetoover450fundraisinginitiatives.

ü Raisedarecord7,595,245AeroplanMilesinDecember2018throughtheAirCanadaFoundation’sMatchingMilescampaignforchildrenrequiringmedicalcareawayfromhome.

Inaddition,thefollowingbusinessprocessimprovementsweremadein2018insupportofAirCanada’ssustainabilityefforts:

ü FirstairlinetobecertifiedforCEIVLiveAnimalsbytheInternationalAirTransportAssociation.

ü Launcheda“Supplierportal”(availableonaircanada.com)tocollectkeyinformationonexistingandprospectivesuppliers.InadditiontocontinuallyimprovingitsSupplierCodeofConduct,AirCanada’sStrategicProcurementteamamendeditsformalsupplierriskassessmentprocessfornewstrategicsuppliersinorderforAirCanadatomonitorforpossiblereputationalriskissues.Theassessmentfocusesonmultitudecriteria,includingenvironmental,healthandsafety,cyber-security,privacycompliance,criminalandotherillegalactivities.

Aswell,AirCanadamadesignificantprogressinitsgoalofbecomingasustainablyprofitableglobalchampion.ItskeyaccomplishmentsinthisregardarefurtherdescribedinAirCanada’spublicdisclosurefile,includinginits2018MD&A.

TherearemanyupcomingprogramstofurthersecureAirCanada’slong-termsustainableperformance,includinginitiativesrelatedtoitsloyaltybusiness.


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SAFETY

> Rankinthetop3%ofairlinesincludedintheIATAOperationalSafetyAudit.

> DeploytheMulti-FactorAuthenticatorProgramtoitsentireemployeebase.

> PursuethePrivacyActionPlan,focusingonsixbroadareastoimproveitsprivacymaturity.

ENVIRONMENT

> Prepareforthefirstdeliveryofthenewfuel-efficientAirbusA220aircraft.

> Continuetoactonthe2020CorporateWasteStrategywiththefollowingkeyactivitiesfor2019:

− Single-UsePlasticsReductionProgramforbothonboardandwithinourworkplaces.

− ExpansionofthecollectionandrecyclingprocessintheMapleLeafLounges.

− CentralizationofwasteinfrastructureatitsMontréalheadquarters.

− AudittheOnboardDomesticRecyclingProgramaspartofitscontinuousimprovementfocusfordomesticflights.

EMPLOYEES

> SupporttheimplementationofAmadeusAltéaSuitepassengerservicesystembyinitiatingtrainingformorethan7,000employees.

> CreateachangemanagementCentreofExcellence.

> FurtherdevelopitsEmergingLeadersProgramtofocusmoredirectlyonsuccessionplansinkeyareasofthebusiness.

COMMUNITIES

> Developcommunitypartnershipsinsupportofregionalnetworkperformance,talentacquisitionandsocio-economicdevelopment.

> AchieveafundraisinggoalfortheAirCanadaFoundationof$2M(net)tosupportcharitableorganizationsfocusingonthehealthandwellnessofchildrenandyouth.

The following is an overview of Air Canada’s corporate sustainability objectives for 2019:


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2018

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

2018 ANNUAL REPORT

Management’sDiscussionandAnalysisofResultsofOperationsandFinancialCondition | 15

2. INTRODUCTION AND KEY ASSUMPTIONS

InthisManagement’sDiscussionandAnalysisofResultsofOperationsandFinancialCondition(“MD&A”),the“Corporation”refers,asthecontextmayrequire,toAirCanadaand/oroneormoreofAirCanada’ssubsidiaries,includingitswholly-ownedoperatingsubsidiaries,TouramLimitedPartnership,doingbusinessasAirCanadaVacations®(“AirCanadaVacations”)andAirCanadaRougeLP,doingbusinessasAirCanadaRouge®(“AirCanadaRouge”).ThisMD&Aprovidesthereaderwithareviewandanalysis,fromtheperspectiveofmanagement,ofAirCanada’sfinancialresultsforthefourthquarterandfullyearof2018.ThisMD&AshouldbereadinconjunctionwithAirCanada’sauditedconsolidatedfinancialstatementsandnotesfor2018.AllfinancialinformationhasbeenpreparedinaccordancewithgenerallyacceptedaccountingprinciplesinCanada(“GAAP”),assetoutintheCPACanadaHandbook–Accounting(“CPAHandbook”),whichincorporatesInternationalFinancialReportingStandards(“IFRS”),asissuedbytheInternationalAccountingStandardsBoard(“IASB”),exceptforanynon-GAAPmeasuresandanyfinancialinformationspecificallydenotedotherwise.

Exceptasotherwisenoted,monetaryamountsarestatedinCanadiandollars.ForanexplanationofcertaintermsusedinthisMD&A,refertosection21“Glossary”ofthisMD&A.Exceptasotherwisenotedorwherethecontextmayotherwiserequire,thisMD&AiscurrentasofFebruary14,2019.

Forward-lookingstatementsareincludedinthisMD&A.See“CautionRegardingForward-LookingInformation”belowforadiscussionofrisks,uncertaintiesandassumptionsrelatingtothesestatements.ForadescriptionofrisksrelatingtoAirCanada,refertosection18“RiskFactors”ofthisMD&A.AirCanadaissuedanewsreleasedatedFebruary15,2019reportingonitsresultsforthefourthquarterandthefullyearof2018.ThisnewsreleaseisavailableonAirCanada’swebsiteataircanada.comandonSEDAR’swebsiteatwww.sedar.com.ForfurtherinformationonAirCanada’spublicdisclosures,includingAirCanada’sAnnualInformationForm,consultSEDARatwww.sedar.com.

CAUTION REGARDING FORWARD-LOOKING INFORMATION

AirCanada’spubliccommunicationsmayincludeforward-lookingstatementswithinthemeaningofapplicablesecuritieslaws.Suchforward-lookingstatementsareincludedinthisMD&Aandmaybeincludedinothercommunications,includingfilingswithregulatoryauthoritiesandsecuritiesregulators.Forward-lookingstatementsmaybebasedonforecastsoffutureresultsandestimatesofamountsnotyetdeterminable.Thesestatementsmayinvolve,butarenotlimitedto,commentsrelatingtostrategies,expectations,plannedoperationsorfutureactions.Forward-lookingstatementsareidentifiedusingtermsandphrasessuchas“anticipate”,“believe”,“could”,“estimate”,“expect”,“intend”,“may”,“plan”,“predict”,“project”,“will”,“would”,andsimilartermsandphrases,includingreferencestoassumptions.

Forward-lookingstatements,bytheirnature,arebasedonassumptions,includingthosedescribedhereinandaresubjecttoimportantrisksanduncertainties.Forward-lookingstatementscannotbereliedupondueto,amongstotherthings,changingexternaleventsandgeneraluncertaintiesofthebusiness.Actualresultsmaydiffermateriallyfromresultsindicatedinforward-lookingstatementsduetoanumberoffactors,includingwithoutlimitation,ourabilitytosuccessfullyachieveorsustainpositivenetprofitabilityortorealizeourinitiativesandobjectives,industry,market,credit,economicandgeopoliticalconditions,energyprices,currencyexchange,competition,ourdependenceontechnology,cybersecurityrisks,ourabilitytosuccessfullyimplementappropriatestrategicinitiativesorreduceoperatingcosts,ourabilitytosuccessfullyintegrateandoperatetheAeroplanloyaltybusinessfollowingitsacquisitionfromAimiaInc.andtosuccessfullylaunchournewloyaltyprogram,ourabilitytopreserveandgrowourbrand,airportuserandrelatedfees,highlevelsoffixedcosts,ourdependenceonkeysuppliersincludingregionalcarriers,employeeandlabourrelationsand

http://aircanada.com

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16 | Management’sDiscussionandAnalysisofResultsofOperationsandFinancialCondition

costs,ourdependenceonStarAllianceandjointventures,interruptionsofservice,environmentalfactors(includingweathersystemsandothernaturalphenomenaandfactorsarisingfromman-madesources),ourabilitytopayourindebtednessandmaintainliquidity,pensionissues,limitationsduetorestrictivecovenants,pendingandfuturelitigationandactionsbythirdparties,ourabilitytoattractandretainrequiredpersonnel,war,terroristacts,casualtylosses,changesinlaws,regulatorydevelopmentsorproceedings,epidemicdiseases,insuranceissuesandcosts,aswellasthefactorsidentifiedinAirCanada’spublicdisclosurefileavailableatwww.sedar.comand,inparticular,thoseidentifiedinsection18“RiskFactors”ofthisMD&A.Theforward-lookingstatementscontainedorincorporatedbyreferenceinthisMD&ArepresentAirCanada’sexpectationsasofthedateofthisMD&A(orasofthedatetheyareotherwisestatedtobemade)andaresubjecttochangeaftersuchdate.However,AirCanadadisclaimsanyintentionorobligationtoupdateorreviseanyforward-lookingstatementswhetherbecauseofnewinformation,futureeventsorotherwise,exceptasrequiredunderapplicablesecuritiesregulations.

KEY ASSUMPTIONS

AssumptionsweremadebyAirCanadainpreparingandmakingforward-lookingstatements.Aspartofitsassumptions,AirCanadaassumescontinuedrelativelymodestCanadianGDPgrowthforthefirstquarterandfullyear2019.AirCanadaalsoexpectsthattheCanadiandollarwilltrade,onaverage,atC$1.32perU.S.dollarinthefirstquarterandforthefullyear2019andthatthepriceofjetfuelwillaverage77CADcentsperlitreinthefirstquarterand82CADcentsperlitreforthefullyear2019.

INTELLECTUAL PROPERTY

AirCanadaownsorhasrightstotrademarks,servicemarksortradenamesusedinconnectionwiththeoperationofitsbusiness.Inaddition,AirCanada’snames,logosandwebsitenamesandaddressesareownedorlicensedbyAirCanada.AirCanadaalsoownsorhastherightstocopyrightsthatalsoprotectthecontentofitsproductsand/orservices.Solelyforconvenience,thetrademarks,servicemarks,tradenamesandcopyrightsreferredtointhisMD&Amaybelistedwithoutthe©,®andTMsymbols,butAirCanadareservesallrightstoassert,tothefullestextentunderapplicablelaw,itsrightsortherightsoftheapplicablelicensorstothesetrademarks,servicemarks,tradenamesandcopyrights.

ThisMD&Amayalsoincludetrademarks,servicemarksortradenamesofotherparties.AirCanada’suseordisplayofotherparties’trademarks,servicemarks,tradenamesorproductsisnotintendedto,anddoesnotimplyarelationshipwith,orendorsementorsponsorshipofAirCanadaby,thetrademark,servicemarkortradenameownersorlicensees.

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3. ABOUT AIR CANADA

AirCanadaisthelargestproviderofscheduledpassengerservicesintheCanadianmarket,theCanada-U.S.transbordermarketandintheinternationalmarkettoandfromCanada.In2018,AirCanada,togetherwithJazzAviationLP(“Jazz”),SkyRegionalAirlinesInc.(“SkyRegional”)andotherregionalairlinesoperatingflightsonbehalfofAirCanadaundercapacitypurchaseagreements,operated,onaverage,1,613dailyscheduledflightsto222directdestinationsonsixcontinents,comprisedof64Canadiancities,60destinationsintheUnitedStatesandatotalof98citiesinEurope,Africa,theMiddleEast,Asia,Australia,theCaribbean,MexicoandSouthAmerica.In2018,AirCanadacarriedarecordof50.9millionpassengers,anincreaseof5.8%from2017.

AtDecember31,2018,AirCanadamainlineoperatedafleetof184aircraft,comprisedof91BoeingandAirbusnarrow-bodyaircraft,74BoeingandAirbuswide-bodyaircraft,and19Embraer190regionaljets,whileAirCanadaRougeoperatedafleetof53aircraft,comprisedof22AirbusA319aircraft,sixAirbusA321aircraftand25Boeing767-300aircraft.

AirCanadaenhancesitsdomesticandtransbordernetworkthroughcapacitypurchaseagreements(“CPAs”)withregionalairlines,namelyJazz,SkyRegionalAirlinesInc.(“SkyRegional”),AirGeorgianLimited(“AirGeorgian”)andExploitsValleyAirServicesLimited(“EVAS”),eachofwhichoperatesflightsonbehalfofAirCanada.Thesecarriersformanintegralpartoftheairline’sinternationalnetworkstrategy,providingvaluabletrafficfeedtoAirCanadaandAirCanadaRougeroutes.AtDecember31,2018,theAirCanadaExpressfleetwascomprisedof45Bombardierregionaljets,84BombardierDash-8turbopropaircraftand25Embraer175aircraftforatotalof154aircraft.AirGeorgianandEVASalsooperatedatotalofnine18-passengerBeech1900aircraftonbehalfofAirCanada.

AirCanadaisafoundingmemberoftheStarAlliance®network.Throughthe28-memberairlinenetwork,AirCanadaoffersitscustomersaccessto1,317destinationsin193countries,aswellasreciprocalparticipationinfrequentflyerprogramsandtheuseofairportloungesandothercommonairportfacilities.

AirCanadaisabletobuildcustomerloyaltythroughAirCanadaAltitude®,itsfrequentflyerprogramandthroughtheAeroplan®loyaltyprogram.AirCanadaAltituderecognizesandrewardsAeroplanmemberswitharangeofpremiumtravelprivilegesandbenefitscorrespondingtotheirtravelactivity,suchasprioritycheck-in,complimentarycheckedbaggageandupgradestoBusinessClass,aswellasopportunitiestoearnAeroplanMilesonAirCanadaflightsandthoseoftheother27StarAlliancememberairlines.AeroplanmembersalsohaveopportunitiestoredeemtheirAeroplanMilesfortravelwithStarAlliancememberairlines.

AirCanadahasbeenpursuingacomprehensivestrategytoimproveprofitabilityandcompetitivenessinleisuremarkets.ThisstrategyleveragesthestrengthsofAirCanada,AirCanadaRouge,theairline’slower-costairline,andAirCanadaVacations.ThroughAirCanadaRouge,AirCanadaispursuingopportunitiesinleisuremarketsmadeviablebyAirCanadaRouge’smorecompetitivecoststructure.AirCanadaVacationsisaleadingCanadiantouroperator,developing,marketinganddistributingvacationtravelpackages,operatingintheoutboundleisuretravelmarket(Caribbean,Mexico,U.S.,Europe,CentralandSouthAmerica,SouthPacific,AustraliaandAsia),andtheinboundleisuretravelmarkettodestinationswithinCanada,andalsoofferingcruisepackagesinNorthAmerica,EuropeandtheCaribbean.

AirCanadaCargo,Canada’slargestproviderofaircargoservicesasmeasuredbycargocapacity,providesdirectcargoservicestoover150Canadian,U.S.transborderandinternationaldestinationsandhassalesrepresentationinover50countries.AircargoservicesareprovidedacrosstheAirCanadanetwork.

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4. STRATEGY

AirCanada’sprincipalobjectiveistobecomeasustainablyprofitableglobalchampion.Inpursuingthisgoal,AirCanadaseekstocontinuallyimprovecustomerexperienceandemployeeengagementandcreatevalueforshareholdersbyfocusingonfourcorepriorities:

1. Identify and implement cost reduction and revenue enhancing initiatives;

2. Pursue profitable international growth opportunities and leverage its competitive attributes to expand margins, in large part by increasing connecting traffic through its strategic international gateways in Toronto, Vancouver and Montreal, and grow and compete effectively in both the business and leisure market to and from Canada;

3. Engage customers by continually enhancing their travel experience and by consistently achieving customer service excellence; and

4. Foster positive culture change. This includes making meaningful investments in training and other tools that promote improved collaboration to enable Air Canada and its employees to better work together in a supportive and enriching environment.

1. Revenue Enhancement and Cost Transformation

Marginimprovementthroughtheimplementationofsustainablecosttransformationandprofitablerevenue-generatinginitiativesisakeypriorityatAirCanada.AirCanadacontinuestoseekandimplementmeasurestoreduceunitcostsandexpandmargins,includingthroughfleetmodernizationandgreaterfleetproductivity.Additionally,AirCanadaseekstoimproveitsabilitytogenerateincrementalpassengerandancillaryrevenue,includingthroughitsexpandedsuiteofbrandedfareproductsandinvestmentsintechnology.

Key achievements in 2018> Recordoperatingrevenueof$18,065million,$1,813millionor11%above2017.

> Carriedrecord50.9millionpassengers,anincreaseof5.8%from2017.

> EBITDARmarginof15.8%,consistentwiththe2018EBITDARmarginofapproximately16%forecastinAirCanada’snewsreleasedatedOctober31,2018.Operatingincomeof$1,174millionin2018reflectedadecreaseof$197millionfrom2017.EBITDARisanon-GAAPfinancialmeasure.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.

> ROICof12.6%,consistentwiththe2018ROICofapproximately12%forecastinAirCanada’snewsreleasedatedOctober31,2018.ROICisanon-GAAPfinancialmeasure.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.

> Realizedoridentifiedsavingsof$220millionunderthenewCostTransformationProgramintendedtosecure$250millioninsavings.AirCanadaexpectstoachievetheremainingsavingsof$30millionbytheendof2019.

> AdjustedCASMincreased0.3%from2017,inlinewiththerangeofnoincreasetoanincreaseof0.75%projectedinAirCanada’snewsreleasedatedOctober31,2018.CASMincreased6.0%from2017.AdjustedCASMisanon-GAAPfinancialmeasure.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.

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> AddedoneAirbusA321,twoAirbusA319andoneBoeing767aircrafttotheAirCanadaRougefleetandfiveBoeing787-9and16Boeing737MAX8aircrafttothemainlinefleet.

> Soldandleasedback25Embraer190aircraft,ofwhichsixwerereturnedtothelessorinlate2018.

> Recordunrestrictedliquidityof$5,725million.

> Finalized,inNovember2018,definitiveagreementstoacquireAimiaInc’sAeroplanloyaltybusinessaswellascommercialagreementsrelatedtoandinsupportofthisacquisitionwithTD,CIBC,andVisa.TheacquisitionwascompletedonJanuary10,2019.

AirCanadaistakingtangiblestepstopursueitsstrategyforsustainedvaluecreationandprofitabilitythroughtheexecutionofnewandon-goingstrategicinitiatives.Theseinclude:

AirCanadaRouge

SinceitsfirstflightinJuly2013,AirCanadaRouge,AirCanada’slow-costcarrier,hasbeendeployedtoagrowingnumberofCaribbeandestinationsandselectleisuredestinationsintheU.S.andCanada,aswellasininternationalleisuremarketswheredemandishighlyelasticandrespondspositivelytocompetitivelypriced,non-stopcapacity.AtDecember31,2018,AirCanadaRougeoperated53aircraft(25Boeing767,22AirbusA319andsixAirbusA321aircraft).AirCanadaplanstoadd10narrow-bodyaircrafttoAirCanadaRouge’sfleetin2019.Refertosection8“Fleet”ofthisMD&Aforadditionalinformation.

AirCanadaRougeprovidesAirCanadawiththeflexibilitytoshiftcapacitybetweenmarketsaswellasbetweenseasons.ItalsoprovidesAirCanadawiththeabilitytocompeteagainstlower-costcarriersaswellasemergingNorthAmericanultra-low-costcarriers.AirCanadaRougeofferscompetitivefareswhileleveragingthestrengthsofAirCanadamainline,includingitspowerfulbrand,award-winningproductsandservices,extensivenetworkwithenhancedconnectionoptions,distributioncapabilityandoperationalexpertise.

Boeing787Aircraft

Todate,AirCanadahastakendeliveryof35Boeing787Dreamlineraircraftofitsfirmorderof37(comprisedof8787-8and29787-9aircraft).AirCanadaplanstotakedeliveryoftheremainingtwoBoeing787-9aircraftonfirmorderbythesummerof2019.TheBoeing787Dreamlinerisdrivingnewopportunitiesforprofitablegrowthbyopeningnewinternationaldestinationsmadeviablebyitsloweroperatingcosts,mid-sizecapacityandlongerrange.

Narrow-bodyFleetRenewalProgram

Todate,AirCanadahastakendeliveryof20Boeing737MAX8aircraftofitsfirmorderof61737MAXaircraft(comprisedof50Boeing737MAX8and11Boeing737MAX9aircraft).TheBoeing737MAXaircraftarereplacingtheAirbusnarrow-bodyaircraftinAirCanada’smainlinefleet.AirCanadaplanstoadd18737Max8aircrafttothemainlinenarrow-bodyfleetin2019.

AirCanadaestimatesthattheBoeing737MAX8aircraftisdeliveringan11%lowerCASMwhencomparedtothemainlineAirbusA320aircraft,mainlydrivenbygreatermaintenanceandfuelefficiencies.Thisaircraftalsooffersgreaterdeploymentopportunitiesinthedomestic,U.S.transborderandcertainAtlanticmarkets.

AirCanadahasafirmorderfor45AirbusA220-300aircraft,thefirstofwhichAirCanadaplanstotakedeliveryofinlate2019.Thefirst25aircraftondeliverywillreplacetheEmbraer190aircraftinAirCanada’smainlinefleet,withtheincrementalaircraftsupportingAirCanada’shubandnetworkgrowth.AirCanadaestimatesthattheAirbusA220-300aircraftwilldelivera12%lowerCASMwhencomparedtotheEmbraer190aircraft,mainlydrivenbygreatermaintenanceandfuelefficiencies.Thisaircraft,withitslongerrange,willalsooffergreaterdeploymentopportunities,enablingAirCanadatoservenewmarketsnotaswellsuitedtoAirCanada’slargerBoeing737MAXorAirbusA321aircraft.Refertosection8“Fleet”ofthisMD&Aforadditionalinformation.

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ImprovementstoCommercialAgreementwithJazzandEquityInvestmentinChorus

InFebruary2019,AirCanadaconcludedanagreementtoamendandextenditscapacitypurchaseagreement(“CPA”)withJazz,awholly-ownedsubsidiaryofChorusAviationInc.TheamendmentswillprovidelongtermstabilityforChorus,reaffirmingJazzasAirCanada’smostsignificantAirCanadaExpresscarrierwellintothefuture.TheamendmentswillbolsterthestrengthandcompetitivenessoftheAirCanadaExpressbrandanditscoast-to-coastregionalnetwork,andprovidesignificantCPAsavingsforAirCanada,whileoptimizingnetworkandfleetflexibilitywhencomparedtothecurrentagreement.

HighlightsoftheCPAamendmentsareasfollows:

> AnextensionoftheCPAtermby10yearsfromJanuary1,2026toDecember31,2035.

> SimplificationandmodernizationoftheJazzfleetwithgrowththroughmore,largergaugeaircraft.Theamendmentsincludevariousminimumlevelsofcoveredaircraftatdifferentpointsintime,providingAirCanadatheflexibilitytooptimizeitsfleetwithinitsnetworkstrategy.

> Thecontinuanceofafixedfeestructure,includingnewtermsmitigatingriskandmarket-orientedcompensationtomaketheCPAmorecompetitiveforAirCanada,givennewcompetitorsenteringthemarket.

> InsupportofAirCanada’scosttransformationprogram,projectedannualsavingstoAirCanadaofapproximately$50millionin2019and2020,andcumulativesavingsofapproximately$53millionbetween2021and2025,bothascomparedtothe2015CPAframe-work(frombothfixedfeeandperformanceincentivereductions).Beyond2025,theCPAprovidesforamarketcompetitivefixedfee.Theseprojectedsavingsareinadditiontothesignificantbenefitsexpectedfromimprovednetworkefficienciesrelatingtothistransaction.

> ThecontinuationofahighlysuccessfulpilotmobilityagreementthatprovidesAirCanadaExpresspilotswithaccesstopilotcareersatAirCanadaonaplannedbasis.

> TheconsolidationofmoreofAirCanada’soverallregionalcapacityintoJazz’footprint,therebyloweringAirCanada’soverallregionalcostsinthefuture.

TheamendmentsbecameeffectiveretroactivelyasatJanuary1,2019.

ConcurrentwiththeCPAamendments,AirCanadamadea$97.26millionequityinvestmentinChorus,subscribingfor15,561,600ClassBvotingsharesinthecapitalofChorus,representing,attimeofissuance,approximately9.99%oftheissuedandoutstandingClassAvariablevotingsharesandClassBvotingsharesofChorusonacombinedbasis.ChorusshareswereissuedtoAirCanadaatapriceof$6.25pershare,representinga5%premiumtotheirfive-dayvolumeweightedaveragepriceasofthecloseoftradingonJanuary10,2019.Concurrentlywiththeclosingoftheequityinvestment,AirCanadaandChorusenteredintoaninvestorrightsagreementunderwhich,amongotherthings,AirCanadawillholdtheinvestmentsharesforaperiodofatleast60months,subjecttocertainlimitedexceptions.DeputyChiefExecutiveOfficerandChiefFinancialOfficerofAirCanada,MichaelRousseau,wasalsoappointedtotheboardofdirectorsofChorus.

OtherRevenueOptimizationandCostReductionInitiatives

AirCanadahascreatedacultureofcontinuouscosttransformationandrevenueimprovementacrosstheorganization,continuallyseekingproductivity,processandotherimprovements.Initiativesmayentailrevisingbusinessandoperationalprocesses,includingsupplychainandmaintenanceoperations,improvingemployeeproductivityandassetutilization,andpromotingworkplacepoliciestoaddrevenueandlowercosts.

AirCanadaupdateditssuiteofbrandedfareproductstoallowittofurthersegmentitscustomerbaseandofferavarietyoffareoptionsandacustomizedon-boardexperience.Thesenewre-bundledfaresprovideawiderrangeofchoicesandstimulatesalesbasedonspecificattributes,drivingincrementalrevenue.AirCanadacontinuestoincreaseitsancillaryrevenuefromits“àlacarte”services,suchasthoserelatedtobaggage,ticketchanges,seatselection,preferredseatingandupgrades,andfromitsonboardofferings,includingfood,beverage,duty-freeshoppingandonboardWi-FiInternet.AirCanadaisalsorealizingincrementalrevenuethroughinvestmentsinwebandmobileplatformsand,in2018,sawasignificantaccelerationindirectchannelshareandcoreancillaryrevenuesales.

Investmentsintechnologywillalsoplayanimportantroleinenhancingmargins,includingtheimplementationofanewpassengerservicesystem(“PSS”)inlate2019whichisfurtherdescribedbelow.Thisnewsystemisexpectedtoprovideannualincrementalbenefitsofover$100million.

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2. Leveraging International Network

AirCanadaisfocusedonleveragingitsinternationalnetworkanditscompetitiveattributestoappropriatelyexpandmargins,inlargepartbyincreasinginternationalconnectingtrafficthroughitsstrategicinternationalgatewaysinToronto,VancouverandMontreal,andcompetingeffectivelyintheleisuremarkettoandfromCanada.AirCanadaalsocontinuestodevelopcommercialallianceswithmajorinternationalcarrierstobroadenitsnetworkofferings.

Key developments in 2018> Introducednon-stopAirCanadamainlineservicefromVancouvertoParisandZurich;from

MontrealtoDublinandTokyo-Narita;andfromTorontotoShannon.

> Launchednon-stopAirCanadaRougeservicefromMontrealtoBucharest,Lisbon,PhoenixandVictoria;fromTorontotoBucharest,Kamloops,Nanaimo,PortoandZagreb;andfromEdmontontoLasVegas.

> Startednon-stopAirCanadaExpressservicefromTorontotoOmahaandProvidence;fromMontrealtoBaltimore,London(ON),Pittsburgh,andWindsor;fromVancouvertoSacramento;fromEdmontontoKelowna,SanFranciscoandVictoria;andfromCalgarytoComox.

> ConvertedAirCanadaRougeservicebetweenMontrealandCasablancatomainlineserviceusinganAirbusA330aircraft.

> Concludedarevenue-sharingjointventureagreementwithAirChina,thefirstjointventureagreementbetweenaChineseandNorthAmericanairline.Theagreement,whichisinrespectofallflightsbetweenmainlandChinaandCanada,allowsforcooperationinvariouscommercialandoperationalareas,includingnetworkplanning,revenuemanagement,salesanddistribution,andairportoperations.Thejointventureagreementprovidescustomersmoreflightchoices,seamlesstravelexperiences,optimizedflightschedules,harmonizedfareproducts,aswellasreciprocalparticipationinfrequentflyerprogramsanduseofairportlounges.AirCanadaandAirChinaalsoenhancedtheircodeshareagreementtoincludeZhengzhou,Xiamen,ShenzhenandNanjingindomesticChinaandVictoria,Kelowna,Saskatoon,andReginaindomesticCanada.Furthermore,thecodeshareagreementnowincludesflightsbetweenMontrealandHavana,andMontrealandShanghai.

> ExpandedthecodeshareagreementwithCathayPacific,furtherwideningthenetworkbyconnectingAirCanada’sservicestoHongKongtomanySoutheastAsiandestinations,includingthePhilippines,Malaysia,VietnamandThailand.Asaresult,AirCanadanowofferscodeshareservicestodestinationssuchasManila,Cebu,KualaLumpur,HoChiMinhCity,Hanoi,Bangkok,PhuketandChiangMai.

> ImplementedanewcodeshareagreementwithAdriaAirways,connectingAirCanada’sservicestoGermanyandBelgium(Frankfurt,MunichandBrussels)toLjubljana,Slovenia.

> ExpandedthecodeshareagreementwithAllNipponAirways(ANA)withtheadditionofANA’scodeonAirCanada’snewMontreal–Naritaservice,providingcustomerswithadditionaltraveloptionstocitieswithinJapanandotherAsiandestinations.

> Increasedsixthfreedomtraffic(international-to-international,includingU.S.)connectingthroughAirCanada’smajorCanadianhubsby15%whencomparedto2017.

AirCanadahascompetitivestrengthswhichallowsittoprofitablypursueinternationalrouteopportunities.Ithastheabilitytoappreciablyincreaseinternational-to-internationaltrafficthroughitsstrategicinternationalgatewaysinToronto,VancouverandMontreal,andisbroadeningitsnetworkappealthroughitsmembershipinStarAlliance,itsrevenue-sharingjointventurewithAirChinaonroutesbetweenCanadaandChina,anditsA++trans-Atlanticrevenue-sharingjointventurewithUnitedAirlinesandDeutscheLufthansaAG,whichthepartiesarefocusedonenhancingtoincreasecompetitiveness,createoperatingefficienciesandimprovecustomerexperience.AirCanada’snetworkisalsoenhancedthroughnumerouscodeshareandinterlineagreements.Furthermore,AirCanadahasaccesstoCanada’swideportfolioofinternationalrouterights,andCanada’smulti-ethnicdemographicprofileprovidestheairlinewithfurtheropportunitiestoprofitablycapturedemandforinternationaltravel.Theseattributes,combinedwithAirCanada’spowerfulbrandandindustry-leadingproductsandservices,allowittoleverageitsnetworkandbenefitfromthehighermarginsgenerallyavailableininternationalmarkets.

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AirCanadaplanstocontinuetoselectivelyandprofitablyexpanditsinternationalservicesbyleveragingitsnewaircraftandimprovedcoststructure,andbyexploitingthefollowingcompetitiveadvantages:

> Awidelyrecognizedbrandandastrongpositioninthemarketfortrans-Atlanticandtrans-PacifictraveltoandfromCanadaandtoandfromNorthandSouthAmericaviaCanada.

> Anextensiveandexpandingglobalnetwork,enhancedbytheairline’smembershipinStarAllianceandbynumerouscommercialarrangements.

> Aflexiblefleetmix,enablingtheairlinetoredeployorotherwisemanagecapacitytomatchchangesindemand.

> AirCanadaAltitude,AirCanada’sfrequentflyerprogram,whichrecognizestheairline’smostfrequentflyersbyofferingthemarangeofexclusivetravelprivileges,includingthebenefitsderivedfromAirCanada’sAeroplanprogram,whichallowsallcustomerstoearnandredeemAeroplanMiles.

> Competitiveproductsandservices,includinglie-flatsuitesintheSignatureClasscabin,conciergeservices,MapleLeaf®loungesand,atitsTorontoglobalhub,anexclusiveAirCanadaSignatureSuiteofferingeligibleSignatureClasscustomersexclusiveamenities,including“àlacarte”mealserviceintheSuite’scomplimentaryrestaurant.

> Geographicallywell-positionedhubs(Toronto,MontrealandVancouver)withefficientin-transitfacilities,accentuatingtheadvantagesofflyingAirCanadaforcustomerstravellingbetweentheU.S.andAsiaorEurope.

> Favourableslottimesatbusyairports,includingBeijing,Shanghai,HongKong,Tokyo-Narita,Tokyo-Haneda,Paris-CharlesdeGaulle,Frankfurt,London-Heathrow,NewYork-LaGuardia,andWashington-RonaldReaganNationalAirport.

In2019,AirCanadaplanstolaunchadditionalinternationalservices,includingnon-stopAirCanadayear-roundflightsfromTorontotoVienna.TheflightstoAustria’scapitalwillbeoperatedincooperationwithStarAlliancejointventurepartnerAustrianAirlines.AirCanadaalsoplanstolaunchnon-stopsummerseasonalservicefromMontrealtoBordeauxandincreaseweeklyfrequenciesfromVancouvertoDelhi,MelbourneandZurich.

AirCanadaenhancesitsdomesticandtransbordernetworkthroughcapacitypurchaseagreementswithJazz,SkyRegionalandotherairlines(operatingundertheAirCanadaExpressbanner).AirCanadaExpressprovidesanetworkoflocaltraffic,aswellashighvolumesoffeedertrafficthatflowintoAirCanada’slong-haulnetworkandsupportitsstrategytogrowinternationaltransittraffictoandfromtheU.S.In2019,AirCanadaplanstoenhanceservicestoNorthCarolina,includingwiththelaunchofanew,non-stopdailyflightbetweenMontrealandRaleigh.TheairlinewillalsodeploylargeraircraftonflightsbetweenTorontoandRaleighandCharlottetoincreasecapacityontheseroutesandintroduceBusinessClassservice.

AirCanadacontinuestoincreasesixthfreedomtraffic,particularlyfromtheU.S.,withitsaward-winningproductsandservices,geographicallywell-positionedCanadianhubs,extensivenetworkandothercompetitiveadvantages.

LesterB.PearsonInternationalAirport(“TorontoPearson”)offersastrategicadvantageduetoitsproximitytodenselypopulatedmajorU.S.marketsandservesalargenumberofbusinessandleisuretravellersflyingtoandfromToronto,Canada’slargestcity.AirCanada’sanditsStarAlliancepartners’operationsareconsolidatedinoneterminalatTorontoPearson,whichalsohasefficientin-transitfacilitiesthatallowpassengersandtheirbagstomoveseamlesslybetweenCanadianandU.S.CustomsandImmigration.Forseveralyears,AirCanadahasworkedcloselywiththeGreaterTorontoAirportsAuthority(“GTAA”)totransformTorontoPearsonintotheleadingNorthAmericanairportandgainagreatershareoftheglobalsixthfreedommarket.

AirCanadahasalsobeengrowingitsVancouverhubintoapremiergatewaytoAsia-PacificmarketsanddevelopingMontrealintoacomplementarytrans-Atlantichub.WithconvenientconnectionsbetweenVancouverandcitiesacrossNorthAmerica,AirCanadaofferssomeoftheshortestelapsedtraveltimebetweencontinentalNorthAmericaandPacificAsia,providingabettertravelexperience.Theairline’sMontrealhubnotonlylinksNorthAmericawithkeymarketsinFrance,butalsopositionsMontrealasapremiergatewaytotheAtlantic.GiventheimprovementsthatarebeingmadeinToronto,VancouverandMontreal,theairlineisabletobuilditsnetworkfromtheU.S.toprovideincreasedconnectionflowstoitsinternationalflights.

Sinceitsinceptionin1997,theStarAlliancenetworkhasgrowntoincludethefollowing28airlines:AdriaAirways,AegeanAirlines,AirCanada,AirChina,AirIndia,AirNewZealand,ANA,AsianaAirlines,AustrianAirlines,Avianca,AviancaBrasil,BrusselsAirlines,CopaAirlines,CroatiaAirlines,EGYPTAIR,EthiopianAirlines,

2018 ANNUAL REPORT


EVAAir,LOTPolishAirlines,Lufthansa,ScandinavianAirlines,ShenzhenAirlines,SingaporeAirlines,SouthAfricanAirways,SwissInternationalAirLinesAG,TAPPortugal,THAI,TurkishAirlinesandUnitedAirlines.

InadditiontoitsmembershipinStarAllianceanditsjointventureagreements,AirCanada’snumerouscodeshareandinterlineagreementsallowittoachievegreatercriticalmassandnetworkscope.AirCanadahas36codesharepartners,ofwhich26areStarAlliancemembersand10arenon-members(AerLingus,CentralMountainAir,Etihad,Eurowings,GOLLinhasAéreasInteligentes,JetAirways,MiddleEastAirlines,SriLankanAirlines,CathayPacificandVirginAustralia).

AirCanadacontinuestoassessnewstrategicpartnershipsinsupportofitsbusinessplanandinternationalgrowthstrategy.

3. Customer Engagement

Providingaconsistentlyhighlevelofcustomerserviceandgrowingtheairline’spremiumcustomerbaseareimportantaspectsofAirCanada’sbusinessstrategy.AirCanadacontinuallystrivestoimprovecustomerloyaltyandgeneratepositivereferralstoattractnewcustomers.Theairlinerecognizesthatitsongoingsuccessisdependentonconsistentlydeliveringsuperiorvalueandinnovativeproducts,providingthehighestlevelsofcustomerserviceandanticipatingthechangingneedsofcustomers.

AcquisitionofAimia’sAeroplanLoyaltyBusiness

AirCanadaAltitudeisdesignedtorecognizeandrewarditsmostfrequenttravellerswithexclusiveperksandprivilegesbasedonthenumberofmilesorsegmentscustomersflycombinedwiththeirtotalspend.Theseprivileges,includingpriorityairportservices,loungeaccess,andeUpgradecredits,aredesignedtoenhancetheAirCanadaexperienceandencourageloyaltyfromfrequentflyers.AltitudemembersalsobenefitfromAirCanada’sAeroplanprogram,whichprovidesawiderangeofwaystoearnandredeemAeroplanMiles,includingflightsandupgradestoover1,200destinationsworldwide.

OnJanuary10,2019,AirCanadacompletedtheclosingofitspurchaseofAimiaCanadaInc.,ownerandoperatoroftheAeroplanloyaltybusiness,fromAimiaInc.Theaggregatepurchasepricefortheacquisitionconsistedof$450millionincashplus$47millionincashforpre-closingadjustments.Thepurchasepriceissubjecttopost-closingadjustmentsandtheacquisitionalsoincludestheassumptionoftheAeroplanMilesliability.AirCanadareceivedpaymentsfromTheToronto-DominionBank(“TD”)andCanadianImperialBankofCommerce(“CIBC”)intheaggregateamountof$822million.VisaCanadaCorporation(“Visa”)alsomadeapaymenttoAirCanadaand,assumingcompletionoftheAmexBankofCanada(“AMEX”)agreementreferredtobelow,AMEXwilldolikewise.

ConcurrentlywiththeconclusionoftheAeroplanpurchase,AirCanada,TD,CIBC,andVisafinalizedvariouscommercialagreementsrelatingtoandinsupportoftheacquisition,includingcreditcardloyaltyprogramandnetworkagreementsforfutureparticipationinAirCanada’snewloyaltyprogram.Inaddition,TDandCIBCmadepaymentstoAimiaCanadaInc.,nowAirCanada’ssubsidiary,intheaggregateamountof$400millionasprepaymentstobeappliedtowardsfuturemonthlypaymentsinrespectofAeroplanMiles.AirCanadaalsohasenteredintoanagreementinprinciplewithAMEX,whichalsoissuesAeroplanco-brandedproducts,tosecureitscontinuedparticipationinAirCanada’sloyaltyprogramafter2020.Followingtheclosingoftheacquisition,AimiaCanadaInc.changeditsnametoAeroplanInc.

Consistentwithitspromiseofcontinuedinvestmentsinthecustomerexperience,AirCanadaplanstolaunchitsnewloyaltyprograminmid-2020.AirCanadabelievesthatthenewprogramwillallowittofurtherstrengthencustomerrelationships,offermembersmoreflexiblerewards,anddeliveramoreconsistentend-to-endcustomerexperience.Thenewprogramwillofferbroadearningandredemptionopportunities,morepersonalizedserviceandabetterdigitalexperienceforAirCanadacustomers.

PassengerServiceSystem

AirCanadaconcludedanagreementwithAmadeusforthefullAmadeusAltéaSuitepassengerservicesystem(PSS)includingreservations,inventoryanddeparturecontrolsolutions.Thenewreservationsystem,scheduledtobeimplementedinlate2019,willallowAirCanadatooptimizeitsflightschedulebyprovidingtheabilitytomoreeasilymanageinventorybetweenanygivenoriginanddestinationandautomaterebookingsduringflightdisruptions,suchasthosecausedbyextremeweather.ItwillalsosupportAirCanada’sinternationalnetworkthroughmoreseamlessbookingandcustomerhandlingwithStarAllianceandinterlinepartners.

2018 ANNUAL REPORT


ProductsandServices

InvestinginproductsandservicesremainspivotaltoAirCanada’scommitmenttocustomerengagement.Tothisend,theairlinehaspartneredwithleadingbrandsandcontinuestoinvestinpremiumproductsthatenhancethecustomer’sjourney.

In2018,AirCanadalaunchedAirCanadaSignatureService,rebrandingthelie-flatBusinessClassproductavailableonmostinternationalmainlineflights,aswellasselectkeytranscontinentalmarkets.AirCanadaSignatureServiceprovideseligiblecustomerswithanend-to-endpremiumexperience,includingaccesstoprioritygroundproducts,includingselectconciergeservices,aswellanexclusiveon-boardexperienceinAirCanadaSignatureClass.

AirCanadaSignatureClasswasalsointroducedinNorthAmerica,replacingBusinessClass–Transcontinental,andforthefirsttimeshowcasingaproductspecificationalignedtointernationalstandardsinNorthAmerica.AirCanadaSignatureClassisavailableonselecttranscontinentalroutes,includingdailyovernightflightsfromLosAngeles,SanFranciscoandVancouvertoToronto.AirCanadaSignatureClassisalsoavailableonflightsbetweenTorontoandHonolulu.

AirCanadaprovidesconciergeassistanceat47airportsglobally.In2019,theairlineplanstoexpandthisservicetoincludeDubaiandVienna.Thepremiumagentprogram,withspecially-trainedcustomersalesandserviceagentsaccreditedspecificallytoworkatPriorityCheck-inandinsidetheMapleLeafLounges,isnowavailableat10Canadianairports,withplanstoexpandtokeylocationsintheU.S.throughout2019.

Throughout2018,AirCanadaalsoexpandedtheuseofafleetofBMWvehicles,operatingaspartoftheAirCanadaValetServiceatTorontoPearson.Attheendof2018,AirCanadaoperatedafleetof20BMW7-serieslimousines,providingselectcustomersconnectingfromadomestictoaninternationalAirCanadaSignatureClasswithapersonalizedairsidedrivebetweenthegateareas.By2019,thiswillmakeAirCanadathefirstairlineinNorthAmericatoprovidethistypeofservicetoBusinessClasscustomers,subjecttocertainrestrictions.

TheMapleLeafLoungeportfoliohasexpandedtoSaskatoon,withtheopeningofAirCanada’s23rdloungeworldwide.AirCanadaalsoopenedanew7,400squarefeetMapleLeafLoungelocatedinsidethenewgateareaatNewYorkLaGuardia,aswellasanew3,600squarefeetMapleLeafLoungeatSt.John’sInternationalAirport.TheloungesatLaGuardiaandSt.John’sInternationalareeachreplacingexistingfacilities,providingasignificantlyimprovedgroundproduct.In2019,AirCanadaexpectstoopenanewMapleLeafLoungeatSanFranciscoInternationalAirport,aswellasstartingacomprehensiverefurbishmentprogramofexistingfacilitiesatkeyhubs.

TheAirCanadaSignatureSuite,apremium“àlacarte”diningfacilityavailableatTorontoPearsonopenforselectcustomersdepartinginAirCanadaSignatureClass,openedinlate2017andhasbeenwellreceivedbycustomersthroughout2018.PlansareunderwaytoreviewandpossiblyexpandtheconcepttoVancouverInternationalAirportin2019.

SeamlessmeansoftransitingthroughAirCanada’shubsatTorontoPearson,VancouverandMontrealTrudeauandenhancementstofacilitiesandprocessessupportingAirCanada’ssixthfreedomtrafficstrategynowallowcustomersconnectingfromJapantoadomesticdestinationtonothavetoclaimtheirbagsattheconnectingpoint,unlessotherwiseadvisedbycustoms.ThisisinadditiontocustomersconnectingfromtheU.S.,EuropeorAustraliatoaCanadianairportthroughthesehubs.Bysummer2019,AirCanadaexpectstohaveallinternationaltodomesticconnectionsincludedintheInternationaltoDomesticprogram.SupportingnewflightstoAsia,during2018,AirCanadaalsoexpandedtheChinaTransitProgramtoincludeMontrealTrudeau,providingeligiblecitizensofthePeople’sRepublicofChinatheopportunitytoconnectthroughMontrealonselecteligibleflightswithouttheneedforaCanadianvisa.

StartingwiththeBoeing787Dreamliner,andthenfollowedbytheBoeing777,AirCanadahasbeenprogressivelyupgradingitswide-bodyaircraftwithnextgenerationcabin,andin-flightentertainmentproducts.Theyhavebeenenthusiasticallyreceivedbycustomersand,in2019,AirCanadawillextendtheseimprovementstoitsfleetofAirbusA330aircraft.AirCanadaalsoreceiveditsfirst18newBoeing737MAX(twoin2017and16in2018)and,inlate2019,willtakeitsfirstdeliveryofthenewAirbusA220aircraft.Theseaircraftbringmarket-leadingcabinsandentertainmentproductstoAirCanada’snarrow-bodyfleet.

AirCanadaandAirCanadaRougehaveexpandedWi-Ficonnectivitytoadditionalaircraftandexpecttohaveallaircraftconnectedbytheendof2019.AirCanadaintroducedcomplimentaryglobalstreamingWi-FiserviceasarewardoptionforAltitudeElite75KandSuperElite100Kmembers,makingAirCanadathefirstairlineinNorthAmericatooffercomplimentaryWi-Fitoitsmostfrequentflyers.

2018 ANNUAL REPORT


AirCanadareceivedanumberofawardsrecognizingitsindustry-leadingproductsandservicesin2018,includingbeingnamedBest Airline in North Americainthe2018SkytraxWorldAirlineAwards,aswellasBest Business Class in North America.SkytraxalsorevalidatedAirCanada’srankingasNorthAmerica’sonlyfour-starInternationalnetworkcarrieraspartofaqualityauditwhichassessedmorethan1,000touch-pointsonthegroundandintheair.Aspartofthefour-starre-certification,AirCanadawasawardedhighmarksfortheAirCanadaSignatureClassserviceonselectNorthAmericantranscontinentalmarkets,thenewBusinessClassseatofferedontheBoeing737MAXaircraft,thestate-of-the-artentertainmentsystemontheBoeingfleet,aswellastheserviceofferedinPremiumEconomyClass,allreflectiveofthesignificantinvestmentinproductandserviceundertakenoverthepreviousyears.Inaddition,theAirCanadaSignatureSuitewasconsideredamongstthebest,ifnotthebestintheworldforbusinessclasspre-flightdining.

Inlate2018,theIpsosReid2018CanadianBusinessTravellerSurveyconfirmedAirCanadaasthepreferredairlinefordomestictravelfor92%offrequentbusinesstravellers.ThenationalstudydeterminedthatAirCanadaistheonlyCanadianairlinetoseeaconsistentincreaseinpreferenceandinusageoverthepastfiveyears.Additionally,readersofleadingfrequentbusinesstravellermagazine,Business Traveler,havenamedAirCanadaBest North American Airline for International Travel,aswellasBest North American Airline for Inflight Experience.Amongotherthings,thesurveyoffrequentbusinesstravellersfound:

> OverallsatisfactionwithAirCanada’sservicecontinuestoincrease,contrastingthatofdomesticcompetitors,climbingsixpercentagepointsover2017forin-flightandfourpercentagepointsforairports.AirCanada’shighestscoresinthelastfiveyearsweredrivenbysatisfactioninitsschedule,loyaltyprogram,customerserviceandperceptionasadynamicorganization.

> AirCanadaistheonlyCanadianairlinethathasseenanincreaseinitsNetPromoterScore(NPS)for2018.

> 96%intendtouseAirCanadafordomesticbusinesstravelinthecomingyear,significantlymorethanthosewhointendedtouseotherCanadiancarriers.

> AirCanadaisthepreferredairlinefortravelbetweenCanadaandtheU.S.,increasingby11percentagepointsoverthelastfiveyears.

> BusinesstravelincreasedthemostinternationallytoEurope,Asiaandotherglobaldestinations,growingbyfivepercentagepointsoverlastyear.

4. Culture Change

AirCanadacontinuestoevolveitsculture,transformingfromatransportationcompanytoacustomerserviceexcellencecompanywhichtreatsisemployeesanditscustomerswithcareandclass.In2018,AirCanadalaunchedanewemployeeengagementsurveywhichprovidedstrongeranalyticsandadeeperunderstandingofwhereadditionalfocusisrequired.Witha30%responserate,thesurveyyieldedmeaningfuldatatodetermineanemployeenetpromoterscore(eNPS).Atotalof78%ofemployeessurveyedwereidentifiedas“promoters”(thetrulyengaged)or“passives”(thoseleaningtowardspositiveoraremoreeasilyinfluencedtobecomepromoterswithsmallincrementalactions).Workenvironment,supportandlearningopportunitieswereidentifiedaskeytakeaways.Thesurveyalsofurtherreinforcedthelinkbetweencustomerperceptionsandemployeebehaviours,whileprovidingmeaningfuldirectionforthedevelopmentof2018and2019initiatives.

AirCanadaalsoregularlyvalidatestheorganizationalpulsethroughfocusgroupsandYammer,itsinternalsocialmediaplatform.Theairlinealsoconnectswithemployeesthroughweeklyexecutivemessagesandmultiplecommunicationschannels,includingadailynewsletter.Over5,000employeesparticipatedintownhallsheldinhangarsacrossthesystemwhichallowedforopenQ&Asessionsbetweenemployeesandexecutives.

Toequipmanagerstoexcelatcriticalface-to-facecommunications,AirCanada’smanagementdevelopmentprogramsfocusoncoachingforsoftskillsthatincluderelationshipbuildingandmakingauthenticconnections.In2019,AirCanadawillfocusontheevolutionofmanager‘softskills’–anessentialingredientinleadershipcompetencydevelopment.

ItisexpectedthatMillennialswillmakeup75%ofAirCanada’sworkforcewithinthenext15years.AirCanada’sdevelopmentprogramsarecustomized,takingintoaccountdifferentlearningandengagementstyles.Theairline’ssuccessionstrategyisnowdrivenbyaTalentBoardcomprisedofexecutivesworkingcloselywithHumanResourcestoidentifyandpreparenewleadership–bothyoungandseasoned.

AirCanadaisalsoleveragingartificialintelligenceandvirtualinterviewstoenhanceitshiringpracticesandensureitisattractingthebestcandidatesinthefield.

2018 ANNUAL REPORT


TheimportanceofdiversityandinclusionatworkisadirectreflectionofAirCanada’sbroadcustomerbaseandakeyelementinAirCanada’shiringstrategy.In2019,aseniorleaderdiversitycounselandcompany-wideemployeebusinessgroupswillidentifyprogramsandopportunitiestopromotediversity,including“WomeninAviation”learningevents,scholarshipsandinternshipsforunder-representedgroups,suchaspeoplewithdisabilityandspectrumlimitations.

AirCanada’sachievementscanbemeasuredinseveralways,includingthroughexternalrecognitionsuchas:

> OneofCanada’sBestDiversityEmployers–2018–MediacorpCanada

> OneofCanada’sTop100Employers–2019–MediacorpCanada

> OneofMontréal’sTopEmployers–2019–MediacorpCanada

> OneofCanada’sMostAttractiveEmployers–2018–UniversumGlobal

> Oneof50MostEngagedWorkplaces™–2018–Achievers

> Oneof2018NorthAmericanCandidateExperienceAwardswinners–TalentBoard

> FifthintheTop20EmployerBrandsinCanada–2018–Randstad

Labour

Startingin2014,AirCanadaenteredintomultiplelong-termlabouragreementswithunionsrepresentingitsunionizedworkforce.Theseagreementsprovideadditionalstabilityandflexibility,aswellasdemonstrateacollaborativepartnershipsupportingitstransformationintoaglobalchampion.Theseagreementsincludethefollowing:

> ACPA(Pilots)–In2014,AirCanadaandACPA,representingpilots,ratifiedanewcontractprovidingcollectiveagreementtermsfor10years,endingSeptember29,2024,subjecttocertainrenegotiationprovisionsandbenchmarksoverthisperiod.In2017,AirCanadaratifiedamendmentstoitsexistinglong-termlabouragreementwithACPA.Theamendmentstothe10-yearagreementprovideadditionalcommercialopportunitiesaswellasincreasedoperationalflexibility.

> IAMAW(Maintenance,OperationsandBaggage)–In2016,AirCanadaandtheIAMAW,representingtechnicalmaintenance,operationalsupportandairportbaggagehandlers,concludedanewcontractprovidingcollectiveagreementtermsfor10years,endingMarch31,2026,subjecttocertainrenegotiationprovisionsoverthisperiod.

> CALDA(Dispatchers)–In2016,AirCanadaandCALDA,representingflightdispatchers,concludedanewcontractprovidingcollectiveagreementtermsfor12years,endingFebruary29,2028,subjecttocertainrenegotiationprovisionsoverthisperiod.

> CUPE(FlightAttendants)–In2015,AirCanadaandCUPE,representingflightattendants,concludedanewcontractprovidingcollectiveagreementtermsfor10years,endingMarch31,2025,subjecttocertainrenegotiationprovisionsoverthisperiod.

> Unifor(CustomerServiceandSalesAgents)–In2015,AirCanadaandUnifor,representingtheairline’scustomerserviceandsalesagentsconcludedanewcontractprovidingcollectiveagreementtermsforfiveyears,endingFebruary28,2020.

2018 ANNUAL REPORT


5. OVERVIEW

Full Year 2018 Financial Summary

ThefollowingisanoverviewofAirCanada’sresultsofoperationsandfinancialpositionforthefullyear2018comparedtothefullyear2017.

> Recordoperatingrevenuesof$18,065millionin2018comparedtooperatingrevenuesof$16,252millionin2017,anincreaseof$1,813millionor11%.Oncapacitygrowthof7.1%,recordpassengerrevenuesof$16,223millionincreased$1,630millionor11.2%from2017.

> Operatingexpensesof$16,891millionin2018versusoperatingexpensesof$14,881millionin2017,anincreaseof$2,010millionor14%.CASMincreased6.0%from2017.AdjustedCASMincreased0.3%from2017.

> Operatingincomeof$1,174millionin2018comparedtooperatingincomeof$1,371millionin2017,adecreaseof$197million.

> EBITDARof$2,851millionin2018comparedtoEBITDARof$2,928millionin2017,adecreaseof$77million.Theairlinereporteda2018EBITDARmargin(EBITDARasapercentageofoperatingrevenue)of15.8%.ThiscomparedtoanEBITDARmarginof18.0%in2017.SpecialitemsareexcludedfromallofAirCanada’sreportedEBITDARcalculations.Refertosection6ofthisMD&Aforinformationonspecialitems.

> Netincomeof$167millionor$0.60perdilutedsharein2018versusnetincomeof$2,029millionor$7.31perdilutedsharein2017.In2018,AirCanadarecordedforeignexchangelossesof$317millionandalossondisposalofassetsof$188million.In2017,AirCanadarecordedadeferredincometaxrecoveryof$759millionandforeignexchangegainsof$120million.

> Adjustednetincomeof$677millionor$2.45perdilutedsharein2018versusadjustednetincomeof$1,145millionor$4.11perdilutedsharein2017.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.

> Adjustednetdebtof$5,858millionatDecember31,2018versusadjustednetdebtof$6,116millionatDecember31,2017,adecreaseof$258million.In2018,increasesinlong-termdebtandfinanceleasebalancesof$533millionandcapitalizedoperatingleasebalancesof$112millionweremorethanoffsetbyanincreaseincash,cashequivalentsandshort-terminvestmentbalancesof$903million.AdjustednetdebtisanadditionalGAAPmeasure.Refertosection9.3“AdjustedNetDebt”ofthisMD&Aforadditionalinformation.

> AirCanada’sleverageratio(adjustednetdebttotrailing12-monthEBITDAR)was2.1atDecember31,2018,unchangedfromDecember31,2017.Leverageratioisanon-GAAPfinancialmeasure.Refertosection9.3“AdjustedNetDebt”ofthisMD&Aforadditionalinformation.

> Netcashflowsfromoperatingactivitiesof$2,695millionin2018versusnetcashflowsfromoperatingactivitiesof$2,738millionin2017.In2018,freecashflowof$791milliondecreased$265millionfrom2017andexceededthe$500millionto$600millionrangeprojectedinAirCanada’snewsreleasedatedOctober31,2018.Thebetterthanexpectedfreecashflowcanbeattributedtoacombinationoflowerthanprojectedcapitalexpenditures,betterthanexpectedcashfromworkingcapitalandstrongerthananticipatedincomefromoperations.Refertosection9.5“ConsolidatedCashFlowMovements”ofthisMD&Aforadditionalinformation.

2018 ANNUAL REPORT


> Returnoninvestedcapital(“ROIC”)forthe12monthsendedDecember31,2018of12.6%,inlinewiththeROICofapproximately12%projectedinAirCanada’snewsreleasedatedOctober31,2018.ThiscomparedtoROICof15.3%forthe12monthsendedDecember31,2017.ThedecreaseinROICversus2017wasmainlydrivenbyloweradjustednetincome,anincreaseinaverageshareholders’equitynetofexcesscashandanincreaseinaircraftrentexpenseyear-over-year.

Fourth Quarter 2018 Financial Summary

ThefollowingisanoverviewofAirCanada’sresultsofoperationsforthefourthquarterof2018comparedtothefourthquarterof2017.

> Recordoperatingrevenuesof$4,246millioninthefourthquarterof2018comparedtooperatingrevenuesof$3,820millioninthefourthquarterof2017,anincreaseof$426millionor11%.Oncapacitygrowthof5.8%,recordpassengerrevenuesof$3,795millionincreased$386millionor11.3%fromthefourthquarterof2017.

> Operatingexpensesof$4,124millioninthefourthquarterof2018versusoperatingexpensesof$3,687millioninthefourthquarterof2017,anincreaseof$437millionor12%.CASMincreased5.7%fromthefourthquarterof2017.AdjustedCASMincreased0.5%fromthefourthquarterof2017,betterthanthe1.5%to2.5%increaseprojectedinAirCanada’snewsreleasedatedOctober31,2018.AirCanada’sbetterthanexpectedadjustedCASMperformancewaslargelyduetoloweraircraftmaintenanceexpense,drivenbyafavourableannualadjustmentrelatedtoend-of-leasemaintenanceprovisions,aswellasthetimingofcertainenginemaintenanceevents.

> Operatingincomeof$122millioninthefourthquarterof2018comparedtooperatingincomeof$133millioninthefourthquarterof2017,adecreaseof$11million.

> RecordEBITDARof$543millioninthefourthquarterof2018comparedtothepreviousrecordEBITDARof$521millioninthefourthquarterof2017,anincreaseof$22million.Theairlinereportedafourthquarter2018EBITDARmarginof12.8%comparedtoanEBITDARmarginof13.6%inthefourthquarterof2017.

> Anetlossof$231millionor$0.85perdilutedshareinthefourthquarterof2018versusnetincomeof$8millionor$0.02perdilutedshareinthefourthquarterof2017.

> Adjustednetincomeof$54millionor$0.20perdilutedshareinthefourthquarterof2018versusadjustednetincomeof$60millionor$0.22perdilutedshareinthefourthquarterof2017.

> Netcashflowsfromoperatingactivitiesof$360millioninthefourthquarterof2018versusnetcashflowsfromoperatingactivitiesof$389millioninthefourthquarterof2017.Freecashflowof$141millioninthefourthquarterof2018representedanimprovementof$184millionfromthefourthquarterof2017.

2018 ANNUAL REPORT


6. RESULTS OF OPERATIONS – Full Year 2018 versus Full Year 2017

ThefollowingtableanddiscussionprovideandcompareresultsofAirCanadafor2018and2017:

(Canadiandollarsinmillions,exceptpersharefigures)

Full Year

2018 2017(1) $Change %Change

Operating revenuesPassenger $ 16,223 $ 14,593 $ 1,630 11Cargo 803 708 95 13Other 1,039 951 88 9Total revenues 18,065 16,252 1,813 11

Operating expensesAircraftfuel 3,969 2,927 1,042 36Regionalairlinesexpense

Aircraftfuel 531 412 119 29Other 2,311 2,205 106 5

Wages,salariesandbenefits 2,873 2,671 202 8Airportandnavigationfees 964 905 59 7Aircraftmaintenance 1,003 938 65 7Depreciation,amortizationandimpairment 1,080 956 124 13Salesanddistributioncosts 807 770 37 5Groundpackagecosts 602 538 64 12Aircraftrent 518 503 15 3Cateringandonboardservices 433 383 50 13Communicationsandinformationtechnology 294 254 40 16Specialitems - 30 (30) (100)Other 1,506 1,389 117 8Total operating expenses 16,891 14,881 2,010 14 Operating income 1,174 1,371 (197)

Non-operating income (expense) Foreignexchangegain(loss) (317) 120 (437)Interestincome 108 60 48Interestexpense (331) (311) (20)Interestcapitalized 35 36 (1)Netfinancingexpenserelatingtoemployeebenefits (50) (65) 15Gain(loss)onfinancialinstrumentsrecordedatfairvalue (1) 23 (24)Gainonsaleandleasebackofassets - 52 (52)Gainondebtsettlementsandmodifications 9 21 (12)Lossondisposalofassets (188) - (188)Other (34) (21) (13)Total non-operating expense (769) (85) (684)Income before income taxes 405 1,286 (881)Incometax(expense)recovery (238) 743 (981)Net income $ 167 $ 2,029 $ (1,862)Diluted earnings (loss) per share $ 0.60 $ 7.31 $ (6.71)

EBITDAR (2) $ 2,851 $ 2,928 $ (77)Adjusted pre-tax income (2) $ 952 $ 1,165 $ (213)Adjusted net income (2) $ 677 $ 1,145 $ (468)Adjusted earnings per share – diluted (2) $ 2.45 $ 4.11 $ (1.66)

(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amounts.

(2)EBITDAR,adjustedpre-taxincome,adjustednetincomeandadjustedearningspershare–dilutedarenon-GAAPfinancialmeasures.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.

2018 ANNUAL REPORT


System Passenger Revenues

WiththeadoptionofIFRS 15–Revenue from Contracts with CustomerseffectiveJanuary1,2018,certainpassengerandcargorelatedfeeswerereclassifiedfromOtherrevenuetoPassengerrevenueandCargorevenueonAirCanada’sconsolidatedstatementofoperations,withrestatementof2017amounts.Thisreclassificationhasnoimpactontotaloperatingrevenue.Concurrentwiththischangeinpresentation,AirCanadahasrevisedthemethodologyusedtocalculateyieldandPRASM.Thesemeasuresarenowbasedontotalpassengerrevenues,withrestatementof2017amountsonthesamebasis.

In2018,systempassengerrevenuesof$16,223millionincreased$1,630millionor11.2%from2017ontrafficgrowthof8.5%andayieldimprovementof2.5%.Onastagelengthadjustedbasis,yieldincreased3.7%whencomparedto2017.Businesscabinrevenues,onasystem-basis,increased$376millionor13.2%from2017ontrafficandyieldgrowthof9.4%and3.5%,respectively.

Thetablebelowprovidespassengerrevenuebygeographicregionforthefullyear2018andthefullyear2017.

(Canadiandollarsinmillions)

Passenger Revenues

Full Year


Canada $ 4,894 $ 4,637 $ 257 5.5U.S.transborder 3,504 3,195 309 9.7Atlantic 4,237 3,539 698 19.7Pacific 2,430 2,195 235 10.7Other 1,158 1,027 131 12.7System $ 16,223 $ 14,593 $ 1,630 11.2


Thetablebelowprovidesyear-over-yearpercentagechangesinpassengerrevenuesandoperatingstatisticsforthefullyear2018versusthefullyear2017.

Full Year 2018 versus Full Year 2017 (1)

Passenger Revenue

Capacity (ASMs)

Traffic (RPMs)

Passenger Load Factor

Yield PRASM

%Change %Change %Change ppChange %Change %Change

Canada 5.5 3.2 2.7 (0.4) 2.7 2.3U.S.transborder 9.7 6.9 7.1 0.1 2.4 2.6Atlantic 19.7 10.4 14.7 3.1 4.4 8.4Pacific 10.7 4.0 5.7 1.4 4.7 6.4Other 12.7 14.7 12.8 (1.4) - (1.7)System 11.2 7.1 8.5 1.0 2.5 3.8

(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amountswhicharereflectedinthetableabove.

Componentsoftheyear-over-yearchangeinfullyearsystempassengerrevenuesincluded:

> The8.5%trafficincreasewhichreflectedtrafficgrowthinallmarketsandincludedgainsinthebusinessandpremiumeconomycabins.Consistentwiththeairline’sobjectiveofincreasingglobalinternational-to-internationalconnectingtrafficthroughitsmajorCanadianhubs(sixthfreedomtraffic),thetrafficgrowthin2018reflectedanincreaseinconnectingtrafficviaCanadatointernationaldestinations.

2018 ANNUAL REPORT


> The2.5%systemyieldincreasewhichreflected:

− increasesinfaresandcarriersurcharges,growthinhigh-yieldinglocaltrafficandanimprovedoverallfaremix;

− greaterproportionalgrowthofhigh-yieldingbusinessandpremiumeconomyclasspassengers;

− anincreaseinancillaryrevenues,includingthroughbaggagefees,advanceseatselection/preferredseatingfeesandairportpaidupgrades;and

− theintroductionofanexpandedsuiteoffareofferingsondomestic,U.S.transborderandAtlanticservices,resultingingrowthinancillaryrevenueandanimprovedfaremix.

Thesefactorswerepartlyoffsetbyanincreaseinaveragestagelengthof2.1%,duetolong-haulinternationalexpansion,whichhadtheeffectofreducingsystemyieldby1.2percentagepoints.

Domestic Passenger Revenues

In2018,domesticpassengerrevenuesof$4,894millionincreased$257millionor5.5%from2017.

Componentsoftheyear-over-yearchangeinfullyeardomesticpassengerrevenuesincluded:

> The2.7%trafficincreasewhichreflectedtrafficgrowthonallmajordomesticservicesaswellasincrementalconnectingtrafficwithinCanadatointernationaldestinations.Thetrafficgrowthin2018includedgainsinthebusinesscabin.

> The2.7%yieldincreasewhichreflectedyieldimprovementsonallmajordomesticservices.Theoverallyieldimprovementversus2017reflectedgainsinthebusinesscabinaswellastheimpactofnewfarecategoriesondomesticservices,resultingingrowthinancillaryrevenue,includingbaggagefees,andanimprovedfaremix.

U.S. Transborder Passenger Revenues

In2018,U.S.transborderpassengerrevenuesof$3,504millionincreased$309millionor9.7%from2017.

Componentsoftheyear-over-yearchangeinfullyearU.S.transborderpassengerrevenuesincluded:

> The7.1%trafficincreasewhichreflectedtrafficgrowthonallmajorU.S.transborderservices.Thetrafficincreasein2018reflectedstrongpassengerdemandbetweenCanadaandtheU.S.,gainsinthebusinesscabinandgrowthininternational-to-internationalconnectingpassengerflowsfromtheU.S.

> The2.4%yieldincreasewhichreflectedyieldgrowthonallmajorU.S.transborderserviceswiththeexceptionofU.S.short-haulroutes.ThelaunchofnewfarecategoriesonU.S.transborderservices,resultingingrowthinancillaryrevenueandanimprovedfaremix,contributedtotheoverallyieldimprovementyear-over-year.Anunfavourablecurrencyimpactof$13millionwasanoffsettingfactor.

Atlantic Passenger Revenues

In2018,Atlanticpassengerrevenuesof$4,237millionincreased$698millionor19.7%from2017.

Componentsoftheyear-over-yearchangeinfullyearAtlanticpassengerrevenuesincluded:

> The14.7%trafficincreasewhichreflectedtrafficgrowthonallmajorAtlanticservicesandincludedgainsinallcabins.The10.4%capacitygrowthyear-over-yearwasmainlyduetothelaunchofnewservicesfromVancouvertoFranceandSwitzerland;fromTorontotoIreland,Portugal,RomaniaandCroatia;andfromMontrealtoIreland,RomaniaandPortugal,aswellastoincreasedfrequenciesonexistingroutes.

> The4.4%yieldincreasewhichreflectedyieldimprovementsonallmajorAtlanticservicesandincludedanincreaseincarriersurchargesyear-over-yearandafavourablecurrencyimpactof$20million.ThelaunchofanewfarecategoryonAtlanticservices,resultingingrowthinancillaryrevenue,includingbaggagefees,andanimprovedfaremix,alsocontributedtotheoverallyieldimprovementyear-over-year.Anincreaseinaveragestagelengthof1.5%,whichhadtheeffectofreducingAtlanticyieldby0.9percentagepoints,wasapartlyoffsettingfactor.

2018 ANNUAL REPORT


Pacific Passenger Revenues

In2018,Pacificpassengerrevenuesof$2,430millionincreased$235millionor10.7%from2017.

Componentsoftheyear-over-yearchangeinfullyearPacificpassengerrevenuesincluded:

> The5.7%trafficincreasewhichreflectedtrafficgrowthonallmajorPacificserviceswiththeexceptionofservicestoHongKongandJapanwherecapacitywasreducedyear-over-year.Thetrafficgrowthincludedgainsinthebusinessandpremiumeconomycabins.

> The4.7%yieldincreasewhichreflectedyieldgrowthonallmajorPacificserviceswiththeexceptionofAustraliawhichwasslightlybelow2017.Theyieldincreaseyear-over-yearincludedgainsinthebusinessandpremiumeconomycabins.TheloweryieldonservicestoAustraliareflectedincreasedindustrycapacitywhencomparedto2017.TheoverallPacificyieldimprovementversus2017includedanincreaseincarriersurchargesyear-over-year,particularlyinJapanandKoreawheresurchargesareregulated.

Other Passenger Revenues

In2018,Otherpassengerrevenues(fromroutestoandfromtheCaribbean,MexicoandCentralandSouthAmerica)of$1,158millionincreased$131millionor12.7%from2017.

Componentsoftheyear-over-yearchangeinfullyearOtherpassengerrevenuesincluded:

> The12.8%trafficincreasewhichreflectedtrafficgrowthonservicestoSouthAmericaandonroutestotraditionalsundestinations.Thetrafficgrowthin2018includedgainsinallcabins.

> Nochangeinyieldwhencomparedto2017asyieldgrowthonservicestotheCaribbeanwasoffsetbyyielddecreasesonservicestoSouthAmericaandMexico.TheyielddeclineonservicestoSouthAmericawasmainlyduetoasignificantincreaseinaveragestagelengthduetotheremovaloftheshort-haultagbetweenSantiagoandBuenosAiresasAirCanadanowservesbothmarketsonanon-stopbasis.TheyielddeclineonservicestoMexicowasmainlydrivenbycompetitivepricingactivitiesduetoincreasedindustrycapacity.Anincreaseinaveragestagelengthof4.1%hadtheeffectofreducingyieldintheOthermarketsby2.3percentagepoints.Onastagelengthadjustedbasis,yieldincreased2.3%whencomparedto2017.

Cargo Revenues

In2018,cargorevenuesof$803millionincreased$95millionor13.6%from2017onyieldandtrafficgrowthof8.1%and5.1%,respectively.In2018,theAtlanticandPacificmarketsexperiencedparticularlystrongperformances.

Thetablebelowprovidescargorevenuebygeographicregionforthefullyear2018andthefullyear2017.

Cargo Revenues Full Year

(Canadiandollarsinmillions) 2018 2017(1) $Change %Change

Canada $ 95 $ 84 $ 11 14.0U.S.transborder 43 39 4 11.5Atlantic 278 245 33 13.7Pacific 325 280 45 16.0Other 62 60 2 2.6System $ 803 $ 708 $ 95 13.6


Other Revenues

In2018,otherrevenuesof$1,039millionincreased$88millionor9%whencomparedto2017,mainlyduetoanincreaseingroundpackagerevenueatAirCanadaVacations,drivenbybothhigherpassengervolumesandahigherpriceofgroundpackageswhencomparedto2017.Anincreaseinpassengerandairline-relatedfeesversus2017wasalsoacontributingfactor.

2018 ANNUAL REPORT


CASM and Adjusted CASM

In2018,CASMincreased6.0%andadjustedCASMincreased0.3%whencomparedto2017.

ThetablebelowcomparesAirCanada’sCASMandadjustedCASMforthefullyear2018tothefullyear2017.

(centsperASM)

Full Year

2018 2017(1) ¢Change %Change

Aircraftfuel ¢ 3.58 ¢ 2.83 ¢ 0.75 26.6Regionalairlinesexpense

Aircraftfuel 0.48 0.40 0.08 20.4Other 2.08 2.13 (0.05) (2.2)

Wagesandsalaries 1.96 1.99 (0.03) (1.4)Benefits 0.63 0.59 0.04 6.4Airportandnavigationfees 0.87 0.87 - (0.6)Aircraftmaintenance 0.90 0.91 (0.01) (0.3)Depreciation,amortizationandimpairment 0.97 0.92 0.05 5.4Salesanddistributioncosts 0.73 0.74 (0.01) (2.2)Groundpackagecosts 0.54 0.52 0.02 4.4Aircraftrent 0.47 0.49 (0.02) (3.8)Cateringandonboardservices 0.39 0.37 0.02 5.5Communicationsandinformationtechnology 0.27 0.25 0.02 7.9Specialitems - 0.03 (0.03) (100.0)Other 1.37 1.34 0.03 1.3CASM ¢ 15.24 ¢ 14.38 ¢ 0.86 6.0 Remove:

Aircraftfuelexpense(2),groundpackagecostsatAirCanadaVacationsandspecialitems

(4.61) (3.78) (0.83) 21.9

Adjusted CASM (3) ¢ 10.63 ¢ 10.60 ¢ 0.03 0.3


(2)Includesaircraftfuelexpenserelatedtoregionalairlineoperations.(3)AdjustedCASMisanon-GAAPfinancialmeasure.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditional

information.

Operating Expenses

In2018,operatingexpensesof$16,891millionincreased$2,010millionor14%from2017oncapacitygrowthof7.1%.

Themorenotablecomponentsoftheyear-over-yearchangeinoperatingexpensesaredescribedbelow.

Aircraft Fuel Expense

In2018,aircraftfuelexpense(includingfuelexpenserelatedtoregionalairlineoperations)amountedto$4,500million,anincreaseof$1,161millionor35%from2017.Thisincreasereflected:

> higherjetfuelprices(beforetheimpactofforeignexchange),whichaccountedforanincreaseof$918million;

> ahighervolumeoffuellitersconsumed,whichaccountedforanincreaseof$165million;

> anunfavourablecurrencyimpactof$44million;and

> fuelhedginglosses/expensesof$36millionin2018versusfuelhedginglosses/expensesof$2millionin2017,anincreaseof$34million.

2018 ANNUAL REPORT


Regional Airlines Expense

In2018,regionalairlinesexpenseof$2,842millionincreased$225millionor9%whencomparedto2017,reflecting,inlargepart,higheraircraftfuelexpenseyear-over-year,aswellasagrowthincapacitypurchasefeesduetoahighervolumeofenginemaintenanceactivitywhencomparedto2017.HigherCPAratesandtheimpactofincreasedflyingwerealsocontributingfactors.

Thetablebelowprovidesabreakdownofregionalairlinesexpenseforthefullyear2018andthefullyear2017.


Full Year

2018 2017 $Change %Change

Capacitypurchasefees $ 1,333 $ 1,267 $ 66 5Aircraftfuel 531 412 119 29Airportandnavigationfees 296 293 3 1Salesanddistributioncosts 153 146 7 5Depreciation,amortizationandimpairment 38 28 10 36Aircraftrent 41 40 1 3Other 450 431 19 4Total regional airlines expense $ 2,842 $ 2,617 $ 225 9

Wages, Salaries and Benefits Expense

In2018,wagesandsalariesexpenseof$2,174millionincreased$115millionor6%from2017,largelyduetoahighernumberoffull-timeequivalent(“FTE”)employees,mainlyinsupportoftheairline’scapacitygrowthandinternationalexpansionstrategy.

In2018,employeebenefitsexpenseof$699millionincreased$87millionor14%from2017,higherthantheincreaseof$75millionprojectedinAirCanada’snewsreleasedatedOctober31,2018.Theincreaseinemployeebenefitsexpensesversus2017wasmainlyduetothehigherlevelofFTEemployeesandtheimpactoflowerdiscountrateswhichincreasedthecurrentservicecostofdefinedbenefitpensionplans.

Airport and Navigation Fees

In2018,airportandnavigationfeesof$964millionincreased$59millionor7%from2017,largelyduetogrowthinwide-bodyandinternationalflying.Inaddition,in2017,AirCanadareceiveda$15millionone-timerefundfromNavCanadawhilenosuchrefundwasreceivedin2018.ThefavourableimpactofAirCanada’sagreementwiththeGreaterTorontoAirportsAuthority,whichisallowingtheairlinetoincreaseinternationalconnectingtrafficatTorontoPearsonInternationalAirportonamorecost-effectivebasis,anda3.9%NavCanadaratereductioneffectiveSeptember1,2017wereoffsettingfactors.

Aircraft Maintenance Expense

In2018,aircraftmaintenanceexpenseof$1,003millionincreased$65millionor7%from2017,betterthantheincreaseof$95millionprojectedinAirCanada’snewsreleasedatedOctober31,2018.Thisbetterthananticipatedperformancewaslargelyduetoanannualadjustmentrelatedtoend-of-leasemaintenanceprovisionsandtotimingofenginemaintenanceevents.Theincreaseinaircraftmaintenanceexpenseversus2017wasmainlydrivenbyanincreaseinengineandcomponentsmaintenanceactivityandtheimpactofhavingadditionalBoeing787aircraftinthefleetin2018,whichhaveenginesunderpower-by-the-hourarrangements.Theseincreaseswerelargelyoffsetbytheimpactofhavingagreaternumberofaircraftleasesbeingextendedin2018andtomorefavourableend-of-leaseconditionsonaircraftleaseextensions.TheimpactofastrongerCanadiandollaronU.S.denominatedmaintenanceexpenseswasalsoanoffsettingfactor.

2018 ANNUAL REPORT


Thetablebelowprovidesabreakdownofthemoresignificantitemsincludedinmaintenanceexpenseforthefullyear2018andthefullyear2017.


Full Year


Technicalmaintenance $ 923 $ 824 $ 99 12Maintenanceprovisions(1) 51 100 (49) (49)Other 29 14 15 107Total aircraft maintenance expense $ 1,003 $ 938 $ 65 7

(1)Maintenanceprovisionsrelatetoreturnconditionsonaircraftleaseswhicharerecordedoverthetermofthelease.

Depreciation, Amortization and Impairment Expense

In2018,depreciation,amortizationandimpairmentexpenseof$1,080increased$124millionor13%from2017,inlinewiththeincreaseof$125millionprojectedinAirCanada’snewsreleasedatedOctober31,2018.Theincreaseindepreciation,amortizationandimpairmentexpenseversus2017waslargelyduetotheadditionofBoeing787and737MAXaircraftintothemainlinefleet.Thesaleof25Embraer190aircraft(whichAirCanadaleasedback),inAugust2018,wasanoffsettingfactor.

Sales and Distribution Costs

In2018,salesanddistributioncostsof$807millionincreased$37millionor5%from2017,reflecting,inlargepart,thegrowthinpassengerrevenue.ThefavourableimpactofnewcommissionprogramsintroducedinNorthAmericainApril2018andgrowthindirectbookingswhencomparedto2017wereoffsettingfactors.

Ground Package Costs

In2018,thecostofgroundpackagesatAirCanadaVacationsof$602millionincreased$64millionor12%whencomparedto2017,mainlyduetohigherpassengervolumesandahighercostofgroundpackages(beforetheimpactofforeignexchange)reflecting,inlargepart,achangeinproductmix.Afavourablecurrencyimpactwasanoffsettingfactor.

Aircraft Rent

In2018,aircraftrentexpenseof$518millionincreased$15millionor3%from2017,reflecting,inlargepart,theimpactofagreaternumberofleasedaircraft,including25Embraer190aircraftwhichAirCanadasoldandleasedbackinAugust2018,partlyoffsetbytheimpactoflowerratesoncertainleaserenewals.

Special Items

Inthefirstquarterof2017,AirCanadarecordedaprovisionof$30millionrelatingtoafinewhichwasreinstatedbyadecisionoftheEuropeanCommissionpertainingtocargoinvestigations.AirCanadapaidthefineinthesecondquarterof2017.AirCanadahasappealedthedecision.WhileAirCanadacannotpredictwithcertaintytheoutcomeofitsappealoranyrelatedproceedings,AirCanadabelievesithasreasonablegroundstochallengetheEuropeanCommission’sruling.Referto“Currentlegalproceedings”undersection18“RiskFactors”ofthisMD&Aforadditionalinformation.

2018 ANNUAL REPORT


Other Expenses

In2018,otherexpensesof$1,506millionincreased$117millionor8%from2017,reflecting,inlargepart,thecapacitygrowthandAirCanada’sinternationalexpansionstrategy,aswellasanincreaseincustomerserviceexpense.Theincreaseincustomerserviceexpensewaspartlyduetotheimpactofoperationaldisruptionscausedbysevereweather,particularlyinthefirsthalfof2018.Inaddition,thefirstquarterof2018includedexpensesof$26millionrelatedtonewuniforms.

Thetablebelowprovidesabreakdownofthemoresignificantitemsincludedinotherexpensesforthefullyear2018andthefullyear2017.


Full Year


Terminalhandling $ 327 $ 296 $ 31 10Crewcycle 212 197 15 8Buildingrentandmaintenance 176 167 9 5Miscellaneousfeesandservices 173 164 9 5Remainingotherexpenses 618 565 53 9Total other expenses $ 1,506 $ 1,389 $ 117 8

Non-operating Income (Expense)

In2018,non-operatingexpenseamountedto$769millionversusnon-operatingexpenseof$85millionin2017.

Componentsoftheyear-over-yearchangeinnon-operatingexpenseincluded:

> In2018,lossesonforeignexchangeamountedto$317millioncomparedtogainsonforeignexchangeof$120millionin2017.TheDecember31,2018closingexchangeratewasUS$1=C$1.3637whiletheDecember31,2017closingexchangeratewasUS$1=C$1.2571.Foreignexchangelossesonlong-termdebtof$501millionwerepartlyoffsetbyforeignexchangegainsonforeigncurrencyderivativesof$245million.

> In2017,AirCanadarecordedagainof$52milliononthesaleandleasebackoffourBoeing787-9aircraft.Nosuchgainswererecordedin2018.

> In2018,AirCanadarecordedagainof$9millionondebtmodifications,whichincludedagainof$11millionrelatedtotherepricingoftheairline’sUS$1.2billionseniorsecuredcreditfacility.Thiscomparedtoagainondebtmodificationsof$27millionin2017,whichwasalsorelatedtotherepricingoftheseniorsecuredcreditfacility.

> In2018,AirCanadarecordedalossondisposalofassetsof$188millionrelatedtothesaleof25Embraer190aircraft.Nosuchlosswasrecordedin2017.AirCanadarealizednetproceedsof$293millionfromthesaleoftheseaircraftin2018.

2018 ANNUAL REPORT


7. RESULTS OF OPERATIONS – Fourth Quarter 2018 versus Fourth Quarter 2017

ThefollowingtableanddiscussionprovideandcompareresultsofAirCanadaforthefourthquarterof2018andthefourthquarterof2017:

(Canadiandollarsinmillions,exceptpersharefigures)

Fourth Quarter


Operating revenuesPassenger $ 3,795 $ 3,409 $ 386 11Cargo 217 198 19 10Other 234 213 21 10Total revenues 4,246 3,820 426 11

Operating expensesAircraftfuel 958 735 223 30Regionalairlinesexpense

Aircraftfuel 133 112 21 19Other 575 563 12 2

Wages,salariesandbenefits 719 674 45 7Airportandnavigationfees 225 201 24 12Aircraftmaintenance 250 243 7 3Depreciation,amortizationandimpairment 267 245 22 9Salesanddistributioncosts 182 169 13 8Groundpackagecosts 126 106 20 19Aircraftrent 133 126 7 6Cateringandonboardservices 104 89 15 17Communicationsandinformationtechnology 69 62 7 11Other 383 362 21 6Total operating expenses 4,124 3,687 437 12 Operating income 122 133 (11)

Non-operating income (expense) Foreignexchangeloss (269) (62) (207)Interestincome 32 18 14Interestexpense (84) (79) (5)Interestcapitalized 8 9 (1)Netfinancingexpenserelatingtoemployeebenefits (12) (18) 6Lossonfinancialinstrumentsrecordedatfairvalue (3) (1) (2)Gainondebtsettlementsandmodifications - 24 (24)Other (10) (4) (6)Total non-operating expense (338) (113) (225)Income (loss) before income taxes (216) 20 (236)Incometaxexpense (15) (12) (3)Net income $ (231) $ 8 $ (239)Diluted earnings (loss) per share $ (0.85) $ 0.02 $ (0.87)EBITDAR (2) $ 543 $ 521 $ 22

Adjusted pre-tax income (2) $ 68 $ 77 $ (9)Adjusted net income (2) $ 54 $ 60 $ (6)Adjusted earnings per share – diluted (2) $ 0.20 $ 0.22 $ (0.02)


(2)EBITDAR,adjustedpre-taxincome,adjustednetincomeandadjustedearningspershare–dilutedarenon-GAAPfinancialmeasures.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.

2018 ANNUAL REPORT


System Passenger Revenues

Inthefourthquarterof2018,systempassengerrevenuesof$3,795millionincreased$386millionor11.3%fromthefourthquarterof2017ontrafficgrowthof7.2%andayieldimprovementof3.8%.Onastagelengthadjustedbasis,yieldincreased4.5%whencomparedtothesamequarterin2017.Businesscabinrevenues,onasystem-basis,increased$92millionor12.5%fromthefourthquarterof2017ontrafficandyieldgrowthof9.3%and2.9%,respectively.

Thetablebelowprovidespassengerrevenuebygeographicregionforthefourthquarterof2018andthefourthquarterof2017.

(Canadiandollarsinmillions) Fourth Quarter

Passenger Revenues 2018 2017(1) $Change %Change

Canada $ 1,216 $ 1,151 $ 65 5.6U.S.transborder 846 746 100 13.4Atlantic 899 763 136 18.0Pacific 550 501 49 9.7Other 284 248 36 14.5System $ 3,795 $ 3,409 $ 386 11.3


Thetablebelowprovidesyear-over-yearpercentagechangesinpassengerrevenuesandoperatingstatisticsforthefourthquarterof2018versusthefourthquarterof2017.

Fourth Quarter 2018 versus Fourth Quarter 2017 (1)

Passenger Revenue

Capacity (ASMs)

Traffic (RPMs)

Passenger Load

Factor

Yield PRASM

%Change %Change %Change ppChange %Change %Change

Canada 5.6 1.5 1.7 0.2 3.9 4.1U.S.transborder 13.4 9.7 9.6 (0.1) 3.5 3.4Atlantic 18.0 9.5 14.5 3.5 3.0 7.7Pacific 9.7 (0.8) 0.3 0.9 9.3 10.6Other 14.5 15.2 14.0 (0.9) 0.5 (0.6)System 11.3 5.8 7.2 1.1 3.8 5.2

(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amountswhicharereflectedinthetableabove.

2018 ANNUAL REPORT


Thetablebelowprovidesyear-over-yearpercentagechangesinsystempassengerrevenuesandoperatingstatisticsforthefourthquarterof2018andeachofthepreviousfourquarters.

Year-over-Year by Quarter (% Change)

System Q4’17(1) Q1’18 Q2’18 Q3’18 Q4’18

Passengerrevenues 11.4 11.8 10.4 11.2 11.3 Capacity(ASMs) 9.5 8.6 7.5 6.7 5.8 Traffic(RPMs) 9.9 11.4 8.2 7.5 7.2 Passengerloadfactor(ppchange) 0.3 2.1 0.5 0.6 1.1 Yield 1.4 0.4 2.0 3.4 3.8 PRASM 1.8 3.0 2.7 4.2 5.2

(1)Toprovideamoremeaningfulcomparison,theyear-over-yearpercentagechangesforthefourthquarter2017versusthefourthquarterof2016arebasedonpreviouslyreported2016and2017amountsas2016amountshavenotbeenrestatedfortheadoptionofIFRS15.

Componentsoftheyear-over-yearchangeinfourthquartersystempassengerrevenuesincluded:

> The7.2%trafficincreasewhichreflectedtrafficgrowthinallmarketsandincludedgainsinthebusinessandpremiumeconomycabins.Consistentwiththeairline’sobjectiveofincreasingglobalinternational-to-internationalconnectingtrafficthroughitsmajorCanadianhubs(sixthfreedomtraffic),thetrafficgrowthinthefourthquarterof2018reflectedanincreaseinconnectingtrafficviaCanadatointernationaldestinations.

> The3.8%systemyieldincreasewhichreflected:

− increasesinfaresandcarriersurcharges,growthinhigh-yieldinglocaltraffic,andanimprovementintheoverallfaremix;

− greaterproportionalgrowthofhigh-yieldingbusinessandpremiumeconomyclasspassengers;

− anincreaseinancillaryrevenues,includingthroughbaggagefees,advanceseatselection/preferredseatingfeesandairportpaidupgrades;

− theintroductionofanexpandedsuiteoffareofferingsondomestic,U.S.transborderandAtlanticservices,resultingingrowthinancillaryrevenueandanimprovedfaremix;and

− afavourablecurrencyimpactof$35millionwhencomparedtothefourthquarterof2017.

Thesefactorswerepartlyoffsetbyanincreaseinaveragestagelengthof1.2%,duetolong-haulinternationalexpansion,whichhadtheeffectofreducingsystemyieldby0.7percentagepoints.

2018 ANNUAL REPORT


Domestic Passenger Revenues

Inthefourthquarterof2018,domesticpassengerrevenuesof$1,216millionincreased$65millionor5.6%fromthefourthquarterof2017.

Thetablebelowprovidesyear-over-yearpercentagechangesindomesticpassengerrevenuesandoperatingstatisticsforthefourthquarterof2018andeachofthepreviousfourquarters.


Canada Q4’17(1) Q1’18 Q2’18 Q3’18 Q4’18

Passengerrevenues 5.4 5.9 6.6 4.3 5.6 Capacity(ASMs) 1.4 3.4 3.2 4.3 1.5 Traffic(RPMs) 1.6 3.0 2.6 3.4 1.7 Passengerloadfactor(ppchange) 0.2 (0.3) (0.5) (0.7) 0.2 Yield 3.5 2.8 3.9 0.9 3.9 PRASM 3.8 2.5 3.2 - 4.1


Componentsoftheyear-over-yearchangeinfourthquarterdomesticpassengerrevenuesincluded:

> The1.7%trafficincreasewhichreflectedtrafficgrowthonallmajordomesticservicesaswellasincrementalconnectingtrafficwithinCanadatointernationaldestinations.Thetrafficgrowthinthefourthquarterof2018includedgainsinthebusinesscabin.

> The3.9%yieldincreasewhichreflectedyieldimprovementsonallmajordomesticservices.Theoverallyieldimprovementversusthefourthquarterof2017reflectedgainsinthebusinesscabinaswellastheimpactofnewfarecategoriesondomesticservices,resultingingrowthinancillaryrevenueandanimprovedfaremix.

U.S. Transborder Passenger Revenues

Inthefourthquarterof2018,U.S.transborderpassengerrevenuesof$846millionincreased$100millionor13.4%fromthefourthquarterof2017.

Thetablebelowprovidesyear-over-yearpercentagechangesinU.S.transborderpassengerrevenuesandoperatingstatisticsforthefourthquarterof2018andeachofthepreviousfourquarters.


U.S. transborder Q4’17(1) Q1’18 Q2’18 Q3’18 Q4’18

Passengerrevenues 6.3 6.9 8.9 9.7 13.4 Capacity(ASMs) 6.7 5.5 6.8 5.9 9.7 Traffic(RPMs) 7.1 6.7 6.6 5.6 9.6 Passengerloadfactor(ppchange) 0.3 0.9 (0.1) (0.3) (0.1)Yield (0.7) 0.1 2.2 3.8 3.5 PRASM (0.3) 1.3 2.0 3.5 3.4


2018 ANNUAL REPORT


Componentsoftheyear-over-yearchangeinfourthquarterU.S.transborderpassengerrevenuesincluded:

> The9.6%trafficincreasewhichreflectedtrafficgrowthonallmajorU.S.transborderservices.Thetrafficincreaseinthefourthquarterof2018reflectedstrongpassengerdemandbetweenCanadaandtheU.S.,gainsinthebusinesscabin,andgrowthininternational-to-internationalconnectingpassengerflowsfromtheU.S.

> The3.5%yieldincreasewhichreflectedyieldgrowthonallmajorU.S.transborderservices.ThelaunchofnewfarecategoriesonU.S.transborderservices,resultingingrowthinancillaryrevenueandanimprovedfaremix,andafavourablecurrencyimpactof$10millioncontributedtotheoverallyieldimprovementyear-over-year.Anincreaseinaveragestagelengthof1.8%,whichhadtheeffectofreducingU.S.transborderyieldby1.0percentagepoints,wasapartlyoffsettingfactor.

Atlantic Passenger Revenues

Inthefourthquarterof2018,Atlanticpassengerrevenuesof$899millionincreased$136millionor18.0%fromthefourthquarterof2017.

Thetablebelowprovidesyear-over-yearpercentagechangesinAtlanticpassengerrevenuesandoperatingstatisticsforthefourthquarterof2018andeachofthepreviousfourquarters.


Atlantic Q4’17(1) Q1’18 Q2’18 Q3’18 Q4’18

Passengerrevenues 22.2 23.9 17.8 20.3 18.0 Capacity(ASMs) 13.9 9.6 11.9 10.3 9.5 Traffic(RPMs) 14.4 17.5 15.5 13.1 14.5 Passengerloadfactor(ppchange) 0.3 5.4 2.6 2.2 3.5 Yield 6.8 5.4 1.9 6.4 3.0 PRASM 7.3 13.0 5.3 9.1 7.7


Componentsoftheyear-over-yearchangeinfourthquarterAtlanticpassengerrevenuesincluded:

> The14.5%trafficincreasewhichreflectedtrafficgrowthonallmajorAtlanticservicesandincludedgainsinallcabins.The9.5%capacitygrowthyear-over-yearwasduetoadditionalfrequenciesfromVancouvertoIndia,anextensionofseasonalmainlineoperations,includingTorontoandMontrealtoItalyandMontrealtoIsrael,andanextensionofseasonalservicesonmanymarketsoperatedbyAirCanadaRouge.

> The3.0%yieldincreasewhichreflectedyieldimprovementsonallmajorAtlanticservicesandincludedanincreaseincarriersurchargesyear-over-yearandafavourablecurrencyimpactof$12million.ThelaunchofanewfarecategoryonAtlanticservices,resultingingrowthinancillaryrevenue,includingbaggagefees,andanimprovedfaremix,alsocontributedtotheoverallyieldimprovementyear-over-year.

2018 ANNUAL REPORT


Pacific Passenger Revenues

Inthefourthquarterof2018,Pacificpassengerrevenuesof$550millionincreased$49millionor9.7%fromthefourthquarterof2017.

Thetablebelowprovidesyear-over-yearpercentagechangesinPacificpassengerrevenuesandoperatingstatisticsforthefourthquarterof2018andeachofthepreviousfourquarters.


Pacific Q4’17(1) Q1’18 Q2’18 Q3’18 Q4’18

Passengerrevenues 13.5 14.2 9.9 9.9 9.7Capacity(ASMs) 12.2 12.0 5.2 1.1 (0.8)Traffic(RPMs) 13.7 15.9 5.7 2.9 0.3Passengerloadfactor(ppchange) 1.0 2.8 0.4 1.5 0.9Yield (0.2) (1.5) 4.0 6.8 9.3PRASM 1.1 1.9 4.5 8.6 10.6


Componentsoftheyear-over-yearchangeinfourthquarterPacificpassengerrevenuesincluded:

> The9.3%yieldincreasewhichreflectedyieldgrowthonallmajorPacificserviceswiththeexceptionofAustraliawhichwasslightlybelowthefourthquarterof2017.TheloweryieldonservicestoAustraliareflectedincreasedindustrycapacitywhencomparedtothesamequarterin2017.TheoverallPacificyieldimprovementversusthefourthquarterof2017includedanincreaseincarriersurchargesyear-over-yearandafavourablecurrencyimpactof$6million.

> The0.3%trafficincreasewhichreflectedtrafficgrowthonservicestoAustralia,KoreaandChina,offsetbytrafficdecreasesonservicestoHongKong,JapanandTaiwanwherecapacitywasreducedyear-over-year.Thetrafficgrowthincludedgainsinthebusinessandpremiumeconomycabins.

Other Passenger Revenues

Inthefourthquarterof2018,Otherpassengerrevenues(fromroutestoandfromtheCaribbean,MexicoandCentralandSouthAmerica)of$284millionincreased$36millionor14.5%fromthefourthquarterof2017.

Thetablebelowprovidesyear-over-yearpercentagechangesinOtherpassengerrevenuesandoperatingstatisticsforthefourthquarterof2018andeachofthepreviousfourquarters.


Other Q4’17(1) Q1’18 Q2’18 Q3’18 Q4’18

Passengerrevenues 23.7 17.7 7.6 7.9 14.5 Capacity(ASMs) 18.7 15.0 11.7 16.8 15.2 Traffic(RPMs) 17.9 15.6 8.6 11.1 14.0 Passengerloadfactor(ppchange) (0.6) 0.4 (2.4) (4.3) (0.9)Yield 4.8 1.9 (0.9) (2.8) 0.5 PRASM 4.1 2.4 (3.7) (7.6) (0.6)


2018 ANNUAL REPORT


Componentsoftheyear-over-yearchangeinfourthquarterOtherpassengerrevenuesincluded:

> The14.0%trafficincreasewhichreflectedtrafficgrowthonservicestoSouthAmericaandonroutestotraditionalsundestinations.Thetrafficgrowthinthefourthquarterof2018includedgainsinallcabins.

> The0.5%yieldincreasewhichreflectedyieldgrowthonservicestotheCaribbeanandMexico,largelyoffsetbyayielddecreaseonservicestoSouthAmerica.TheyielddeclineonservicestoSouthAmericawasmainlydueasignificantincreaseinaveragestagelengthduetotheremovaloftheshort-haultagbetweenSantiagoandBuenosAiresasAirCanadanowservesbothmarketsonanon-stopbasis.Anincreaseinaveragestagelengthof6.1%hadtheeffectofreducingyieldintheOthermarketsby3.4percentagepoints.Onastagelengthadjustedbasis,yieldincreased3.9%whencomparedtothefourthquarterof2017.

Cargo Revenues

Inthefourthquarterof2018,cargorevenuesof$217millionincreased$19millionor10.0%fromthesamequarterin2017onyieldandtrafficgrowthof6.8%and2.9%,respectively.Inthefourthquarterof2018,theAtlanticandPacificmarketsexperiencedparticularlystrongperformances.

Thetablebelowprovidescargorevenuebygeographicregionforthefourthquarterof2018andthefourthquarterof2017.

Cargo Revenues Fourth Quarter

(Canadiandollarsinmillions) 2018 2017(1) $Change %Change

Canada $ 27 $ 23 $ 4 21.3U.S.transborder 12 10 2 23.2Atlantic 72 66 6 8.5Pacific 88 81 7 9.2Other 18 18 - (2.5)System $ 217 $ 198 $ 19 10.0


Other Revenues

Inthefourthquarterof2018,otherrevenuesof$234millionincreased$21millionor10%whencomparedtothefourthquarterof2017,mainlyduetoanincreaseingroundpackagerevenueatAirCanadaVacations.Thisincreasewasdrivenbyhigherpassengervolumesand,toalesserextent,ahigherpriceofgroundpackageswhencomparedtothefourthquarterof2017.Anincreaseinpassengerandairline-relatedfeesversusthefourthquarterof2017wasalsoacontributingfactortotheincreaseinotherrevenue.

2018 ANNUAL REPORT


CASM and Adjusted CASM

Inthefourthquarterof2018,CASMincreased5.7%andadjustedCASMincreased0.5%whencomparedtothefourthquarterof2017.

ThetablebelowcomparesAirCanada’sCASMandadjustedCASMforthefourthquarterof2018tothefourthquarterof2017.

(centsperASM)

Full Year

2018 2017(1) ¢Change %Change

Aircraftfuel ¢ 3.74 ¢ 3.04 ¢ 0.70 23.1Regionalairlinesexpense

Aircraftfuel 0.52 0.46 0.06 12.0Other 2.25 2.33 (0.08) (3.3)

Wagesandsalaries 2.18 2.26 (0.08) (3.4)Benefits 0.63 0.53 0.10 18.4Airportandnavigationfees 0.88 0.83 0.05 5.5Aircraftmaintenance 0.98 1.01 (0.03) (3.1)Depreciation,amortizationandimpairment 1.04 1.01 0.03 2.8Salesanddistributioncosts 0.71 0.70 0.01 1.3Groundpackagecosts 0.49 0.44 0.05 11.6Aircraftrent 0.52 0.52 - 0.4Cateringandonboardservices 0.41 0.37 0.04 11.0Communicationsandinformationtechnology 0.27 0.26 0.01 4.4Other 1.49 1.48 0.01 0.8CASM ¢ 16.11 ¢ 15.24 ¢ 0.87 5.7 Remove:

Aircraftfuelexpense(2),groundpackagecostsatAirCanadaVacationsandspecialitems

(4.75) (3.94) (0.81) 20.5

Adjusted CASM (3) ¢ 11.36 ¢ 11.30 ¢ 0.06 0.5


(2)Includesaircraftfuelexpenserelatedtoregionalairlineoperations.(3)AdjustedCASMisanon-GAAPfinancialmeasure.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditional

information.

Operating Expenses

Inthefourthquarterof2018,operatingexpensesof$4,124millionincreased$437millionor12%fromthefourthquarterof2017oncapacitygrowthof5.8%.

Inthefourthquarterof2018,theunfavourableimpactofaweakerCanadiandollaronforeigncurrencydenominatedoperatingexpenses(mainlyU.S.dollars),comparedtothesamequarterin2017,increasedoperatingexpensesby$64million(comprisedof$37millionrelatedtoaircraftfuelexpenseandanaggregateof$27millionrelatingtonon-fueloperatingexpenses).

2018 ANNUAL REPORT


Themorenotablecomponentsoftheyear-over-yearchangeinoperatingexpensesaredescribedbelow.

Aircraft Fuel Expense

Inthefourthquarterof2018,aircraftfuelexpense(includingfuelexpenserelatedtoregionalairlineoperations)amountedto$1,091million,anincreaseof$244millionor29%fromthefourthquarterof2017.Thisincreasereflected:

> higherjetfuelprices(beforetheimpactofforeignexchange),whichaccountedforanincreaseof$151million;

> anunfavourablecurrencyimpactof$37million;

> ahighervolumeoffuellitresconsumed,whichaccountedforanincreaseof$27million;and

> fuelhedginglosses/expensesof$26millioninthefourthquarterof2018versusfuelhedginggains(netofexpenses)of$3millioninthefourthquarterof2017,anincreaseof$29million.

Regional Airlines Expense

Inthefourthquarterof2018,regionalairlinesexpenseof$708millionincreased$33millionor5%whencomparedtothefourthquarterof2017,reflecting,inlargepart,higheraircraftfuelexpenseyear-over-year,aswellasagrowthincapacitypurchasefeesduetohigherCPAratesyear-over-year.

Thetablebelowprovidesabreakdownofregionalairlinesexpenseforthefourthquarterof2018andthefourthquarterof2017.


Fourth Quarter


Capacitypurchasefees $ 336 $ 330 $ 6 2Aircraftfuel 133 112 21 19Airportandnavigationfees 73 71 2 3Salesanddistributioncosts 34 35 (1) (3)Depreciation,amortizationandimpairment 11 7 4 57Aircraftrent 10 10 - -Other 111 110 1 1Total regional airlines expense $ 708 $ 675 $ 33 5

Wages, Salaries and Benefits Expense

Inthefourthquarterof2018,wagesandsalariesexpenseof$557millionincreased$11millionor2%fromthesamequarterin2017,largelyduetoahighernumberofFTEemployeesmainlyinsupportoftheairline’scapacitygrowthandinternationalexpansionstrategy.

Inthefourthquarterof2018,employeebenefitsexpenseof$162millionincreased$34millionor27%fromthefourthquarterof2017,mainlyduetothehigherlevelofFTEemployeesandtheimpactoflowerdiscountrateswhichincreasedthecurrentservicecostofdefinedbenefitpensionplans.Inaddition,thefourthquarterof2017reflectedafavourableimpactof$9millionrelatedtoanannualvaluationpertainingtoworkers’compensationversusanunfavourableimpactof$4millioninthefourthquarterof2018.

Airport and Navigation Fees

Inthefourthquarterof2018,airportandnavigationfeesof$225millionincreased$24millionor12%fromthefourthquarterof2017,largelyduetogrowthinwide-bodyandinternationalflying.Inaddition,inthefourthquarterof2017,AirCanadareceiveda$15millionone-timerefundfromNavCanadawhilenosuchrefundwasreceivedinthefourthquarterof2018.ThefavourableimpactofAirCanada’sagreementwiththeGreaterTorontoAirportsAuthority,whichisallowingtheairlinetoincreaseinternationalconnectingtrafficatTorontoPearsonInternationalAirportonamorecost-effectivebasis,wasanoffsettingfactor.

2018 ANNUAL REPORT


Aircraft Maintenance Expense

Inthefourthquarterof2018,aircraftmaintenanceexpenseof$250millionincreased$7millionor3%fromthefourthquarterof2017.

Thetablebelowprovidesabreakdownofthemoresignificantitemsincludedinmaintenanceexpenseforthefourthquarterof2018andthefourthquarterof2017.


Fourth Quarter


Technicalmaintenance $ 222 $ 206 $ 16 8Maintenanceprovisions(1) 17 31 (14) (45)Other 11 6 5 83Total aircraft maintenance expense $ 250 $ 243 $ 7 3

(1)Maintenanceprovisionsrelatetoreturnconditionsonaircraftleaseswhicharerecordedoverthetermofthelease.

Depreciation, Amortization and Impairment Expense

Inthefourthquarterof2018,depreciation,amortizationandimpairmentexpenseof$267millionincreased$22millionor9%fromthefourthquarterof2017,largelyduetotheadditionofBoeing787and737MAXaircraftintothemainlinefleet.Thesaleof25Embraer190aircraft(whichAirCanadaleasedback)inAugust2018wasanoffsettingfactor.

Sales and Distribution Costs

Inthefourthquarterof2018,salesanddistributioncostsof$182millionincreased$13millionor8%fromthesamequarterin2017,reflecting,inlargepart,thegrowthinpassengerrevenue.ThefavourableimpactofnewcommissionprogramsintroducedinNorthAmericainApril2018andgrowthindirectbookingswhencomparedtothefourthquarterof2017wereoffsettingfactors.

Ground Package Costs

Inthefourthquarterof2018,thecostofgroundpackagesatAirCanadaVacationsof$126millionincreased$20millionor19%whencomparedtothesamequarterin2017duetoahighercostofgroundpackages(beforetheimpactofforeignexchange)reflecting,inlargepart,achangeinproductmix,andhigherpassengervolumesyear-over-year.

Aircraft Rent

Inthefourthquarterof2018,aircraftrentexpenseof$133millionincreased$7millionor6%fromfourthquarterof2017,reflecting,inlargepart,theimpactofagreaternumberofleasedaircraft,including25Embraer190aircraftwhichAirCanadasoldandleasedbackinAugust2018,andanunfavourablecurrencyimpactwhencomparedtothefourthquarterof2017.Theimpactoflowerratesoncertainleaserenewalswasanoffsettingfactor.

2018 ANNUAL REPORT


Other Expenses

Inthefourthquarterof2018,otherexpensesof$383millionincreased$21millionor6%fromthesamequarterin2017,reflecting,inlargepart,thecapacitygrowthandAirCanada’sinternationalexpansionstrategy.

Thetablebelowprovidesabreakdownofthemoresignificantitemsincludedinotherexpensesforthefourthquarterof2018andthefourthquarterof2017.


Fourth Quarter


Terminalhandling $ 77 $ 69 $ 8 12Crewcycle 52 51 1 2Buildingrentandmaintenance 47 41 6 15Miscellaneousfeesandservices 50 45 5 11Remainingotherexpenses 157 156 1 1Total other expenses $ 383 $ 362 $ 21 6

Non-operating Income (Expense)

Inthefourthquarterof2018,non-operatingexpenseamountedto$338millionversusnon-operatingexpenseof$113millioninthefourthquarterof2017.

Componentsoftheyear-over-yearchangeinnon-operatingexpenseincluded:

> Inthefourthquarterof2018,lossesonforeignexchangeamountedto$269millioncomparedtolossesonforeignexchangeof$62millioninthefourthquarterof2017.TheDecember31,2018closingexchangeratewasUS$1=C$1.3637whiletheSeptember30,2018closingexchangeratewasUS$1=C$1.2908.Foreignexchangelossesonlong-termdebtof$333millionwerepartlyoffsetbyforeignexchangegainsonforeigncurrencyderivativesof$75million.

> Inthefourthquarterof2017,AirCanadarecordedagainof$27millionondebtmodificationsrelatedtotherepricingoftheairline’sUS$1.2billionseniorsecuredcreditfacility.Nosuchgainswererecordedinthefourthquarterof2018.

2018 ANNUAL REPORT


8. FLEET

Mainline and Air Canada Rouge

ThefollowingtableprovidesAirCanada’sandAirCanadaRouge’soperatingfleetasatDecember31,2018.RefertotheAirCanadaExpresssectionbelowforinformationonthefleetofaircraftoperatedbyregionalairlinesoperatingflightsonbehalfofAirCanadaundercapacitypurchaseagreementswithAirCanada.

Total Seats

Number of Operating

Aircraft

Average Age

Owned Finance Lease

Operating Lease

MainlineWide-body aircraftBoeing787-8 255 8 4.2 8 - -Boeing787-9 298 27 2.1 21 - 6Boeing777-300ER 450/400 19 8.5 10 1 8Boeing777-200LR 300 6 11.1 4 - 2Boeing767-300ER 211 6 29.5 3 - 3AirbusA330-300 292 8 18.2 8 - -Narrow-body aircraftBoeing737MAX8 169 18 0.8 18 - -AirbusA321 190 15 15.7 5 - 10AirbusA320 146 42 25.2 1 - 41AirbusA319 120 16 21.2 5 - 11Embraer190 97 19 11.3 - - 19Total Mainline 184 13.6 83 1 100

Air Canada RougeWide-body aircraftBoeing767-300ER(1) 282 25 21.6 3 2 20Narrow-body aircraftAirbusA321 200 6 3.7 - - 6AirbusA319(1) 136 22 20.2 17 - 5Total Air Canada Rouge 53 19.0 20 2 31

Total Mainline and Air Canada Rouge

237 14.8 103 3 131

(1)TheBoeing767aircraftandtheAirbusA319aircraftreflectedasownedinthetableaboveareownedbyAirCanadaandleasedtoAirCanadaRouge.

2018 ANNUAL REPORT


ThetablebelowprovidesthenumberofaircraftinAirCanada’soperatingfleetasatDecember31,2018aswellasAirCanada’splannedoperatingfleet,includingaircraftoperatingandexpectedtobeoperatedbyAirCanadaRouge,asatDecember31,2019andDecember31,2020.

Actual PlannedDecember 31,

20182019FleetChanges

December31,2019

2020FleetChanges

December31,2020

MainlineWide-body aircraft Boeing787-8 8 - 8 - 8Boeing787-9 27 2 29 - 29Boeing777-300ER 19 - 19 - 19Boeing777-200LR 6 - 6 - 6Boeing767-300ER 6 (6) - - -AirbusA330-300 8 4 12 1 13Narrow-body aircraft Boeing737MAX8 18 18 36 14 50AirbusA321 15 - 15 - 15AirbusA320 42 (13) 29 (13) 16AirbusA319 16 - 16 - 16AirbusA220-300 - 1 1 14 15Embraer190 19 (5) 14 (14) -Total Mainline 184 1 185 2 187

Air Canada RougeWide-body aircraftBoeing767-300ER 25 - 25 - 25Narrow-body aircraftAirbusA321 6 4 10 - 10AirbusA320 - 6 6 1 7AirbusA319 22 - 22 - 22Total Air Canada Rouge 53 10 63 1 64

Total wide-body aircraft 99 - 99 1 100Total narrow-body aircraft 138 11 149 2 151

Total Mainline and Air Canada Rouge

237 11 248 3 251

2018 ANNUAL REPORT


Sale of Embraer 190 Aircraft

InAugust2018,AirCanadafinalizedthesaleandleasebackof25Embraer190aircraft.Sixoftheseaircraftwerereturnedtothelessorin2018.AirCanadawillcontinuetooperatetheremaining19untiltheygraduallyexitthefleetin2019and2020.

Air Canada Express

Thetablebelowprovidesthenumberofaircraftoperated,asatDecember31,2018,andplanned,asatDecember31,2019andDecember31,2020,onbehalfofAirCanada,byJazz,SkyRegionalandotherairlinesoperatingflightsundertheAirCanadaExpressbannerpursuanttocapacitypurchaseagreementswithAirCanada.

Actual PlannedDecember31,

20182019FleetChanges

December31,2019

2020FleetChanges

December31,2020

Embraer175 25 - 25 - 25BombardierCRJ-100/200 24 (2) 22 (7) 15BombardierCRJ-900 21 5 26 9 35BombardierDash8-100 15 (15) - - -BombardierDash8-300 25 (2) 23 (4) 19BombardierDash8-Q400 44 - 44 (8) 36Total Air Canada Express 154 (14) 140 (10) 130

Other Aircraft with CPA Carriers

Atotalofnine18-passengerBeech1900aircraftarealsooperatedbyCPAcarriersonbehalfofAirCanada.

2018 ANNUAL REPORT


9. FINANCIAL AND CAPITAL MANAGEMENT

9.1.LIQUIDITY

AirCanadamanagesitsliquidityneedsthroughavarietyofstrategies,includingbyseekingtosustainandimprovecashfromoperationsandfreecashflow,sourcingcommittedfinancing,asnecessary,fornewandexistingaircraft,andthroughotherfinancingactivities.

Liquidityneedsareprimarilyrelatedtomeetingobligationsassociatedwithfinancialliabilities,capitalcommitments,ongoingoperations,contractualandotherobligations,whicharefurtherdiscussedinsections9.6,9.7and9.8ofthisMD&A.AirCanadamonitorsandmanagesliquidityriskbypreparingrollingcashflowforecasts,monitoringtheconditionandvalueofassetsavailableforuseaswellasthoseassetsbeingusedassecurityinfinancingarrangements,seekingflexibilityinfinancingarrangements,andestablishingprogramstomonitorandmaintaincompliancewithtermsoffinancingagreements.AtDecember31,2018,unrestrictedliquidityamountedto$5,725million(comprisedofcash,cashequivalentsandshort-terminvestmentsof$4,707millionandundrawnlinesofcreditof$1,018million.Thiscomparedtounrestrictedliquidityof$4,181millionatDecember31,2017(comprisedofcash,cashequivalentsandshort-terminvestmentsof$3,804millionandundrawnlinesofcreditof$377million).Inaddition,AirCanadamonitorsitsfinancialleverageasmeasuredbytheadjustednetdebttoEBITDARratio,asfurtherdescribedinsection9.3ofthisMD&A.

9.2.FINANCIALPOSITION

ThefollowingtableprovidesacondensedconsolidatedstatementoffinancialpositionofAirCanadaasatDecember31,2018andasatDecember31,2017.


December 31, 2018

December31,2017(1)

$Change

AssetsCash,cashequivalentsandshort-terminvestments $ 4,707 $ 3,804 $ 903Othercurrentassets 1,594 1,593 1Current assets $ 6,301 $ 5,397 $ 904Depositsandotherassets 444 465 (21)Propertyandequipment 9,729 9,252 477Pensionassets 1,969 1,583 386Deferredincometax 39 456 (417)Intangibleassets 404 318 86Goodwill 311 311 -Total assets $ 19,197 $ 17,782 $ 1,415LiabilitiesCurrentliabilities $ 5,099 $ 5,101 $ (2)Long-termdebtandfinanceleases 6,197 5,448 749Pensionandotherbenefitliabilities 2,547 2,592 (45)Maintenanceprovisions 1,118 1,003 115Otherlong-termliabilities 151 167 (16)Deferredincometax 52 49 3Total liabilities $ 15,164 $ 14,360 $ 804Total shareholders’ equity $ 4,033 $ 3,422 $ 611Total liabilities and shareholders’ equity $ 19,197 $ 17,782 $ 1,415


2018 ANNUAL REPORT


Movementsincurrentassetsandcurrentliabilitiesaredescribedinsection9.4“WorkingCapital”ofthisMD&A.Long-termdebtandfinanceleasesarediscussedinsections9.3“AdjustedNetDebt”and9.5“ConsolidatedCashFlowMovements”ofthisMD&A.

AtDecember31,2018,propertyandequipmentamountedto$9,729million,anincreaseof$477millionfromDecember31,2017.Thisincreasewasmainlyduetoadditionstopropertyandequipmentof$2,039million,offsetbytheimpactofdepreciationexpenseof$1,066millionandtheimpactofthesaleof25Embraer190aircraftin2018.

In2018,additionstopropertyandequipmentincludedfiveBoeing787-9aircraftand16Boeing737MAX8aircraft.FourBoeing787andnineBoeing737MAXaircraftwerefinancedwithproceedsfromthesaleofenhancedequipmenttrustcertificates(EETCs)issuedthroughaU.S.dollarprivateofferingin2017,oneBoeing787andfourBoeing737MAXaircraftwerefinancedwithproceedsfromthesaleofEETCsissuedthroughaCanadiandollarprivateofferingin2018,andthreeBoeing737MAXaircraftwerepurchasedwithcash.AdditionalinformationontheseEETCprivateofferingscanbefoundinsection9.8“ContractualObligations”ofthisMD&A.In2018,additionstopropertyandequipmentalsoincludedprogresspaymentsonfutureaircraftdeliveriesandcapitalizedmaintenancecosts.

Thenetlong-termpensionandotherbenefitliabilitiesof$578million(comprisedofpensionandotherbenefitliabilitiesof$2,547millionnetofpensionassetsof$1,969million)decreased$431millionfromDecember31,2017.Thisdecreasewasmainlyduetoa21-basispointincreaseinthediscountrateusedtovaluetheliabilitiesandtheimpactofreviseddemographicassumptions,resultinginanetgainonremeasurementsonemployeeliabilitiesof$688millionfortheyearendedDecember31,2018($503million,netoftax)recordedonAirCanada’sconsolidatedstatementofcomprehensiveincome.Thereviseddemographicassumptionsrelatemainlytoupdatedactuarialassumptionsregardingretirementrates,whichresultedinadecreasetotheactuarialliabilityof$277million.

9.3.ADJUSTEDNETDEBT

ThefollowingtablereflectsAirCanada’sadjustednetdebtbalancesasatDecember31,2018andasatDecember31,2017.

(Canadiandollarsinmillions)December 31,

2018December31,

2017$Change

Totallong-termdebtandfinanceleases $ 6,197 $ 5,448 $ 749Currentportionoflong-termdebtandfinanceleases 455 671 (216)

Total long-term debt and finance leases (including current portion)

$ 6,652 $ 6,119 $ 533

Lesscash,cashequivalentsandshort-terminvestments (4,707) (3,804) (903)Net debt $ 1,945 $ 2,315 $ (370)Capitalizedoperatingleases(1) 3,913 3,801 112Adjusted net debt (1) $ 5,858 $ 6,116 $ (258)EBITDAR (trailing 12 months) $ 2,851 $ 2,928 $ (77)Adjusted net debt to EBITDAR ratio (2) 2.1 2.1 -

(1)AdjustednetdebtisanadditionalGAAPfinancialmeasureandakeycomponentofthecapitalmanagedbyAirCanadaandprovidesmanagementwithameasureofitsnetindebtedness.AirCanadaincludescapitalizedoperatingleaseswhichisameasurecommonlyusedintheindustrytoascribeavaluetoobligationsunderoperatingleases.Commonindustrypracticeistomultiplyannualizedaircraftrentexpenseby7.ThisdefinitionofcapitalizedoperatingleasesisusedbyAirCanadaandmaynotbecomparabletosimilarmeasurespresentedbyotherpubliccompanies.Aircraftrent(includingaircraftrentexpenserelatedtoregionalairlineoperations)was$559millionforthe12monthsendedDecember31,2018and$543millionforthe12monthsendedDecember31,2017.

(2)Adjustednetdebttotrailing12-monthEBITDARratio(alsoreferredtoas“leverageratio”inthisMD&A)isanon-GAAPfinancialmeasureandisusedbyAirCanadaasameanstomeasurefinancialleverage.Leverageratioiscalculatedbydividingadjustednetdebtbytrailing12-monthEBITDAR.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.

AtDecember31,2018,totallong-termdebtandfinanceleases(includingcurrentportion)of$6,652millionincreased$533millionfromDecember31,2017.TheunfavourableimpactofaweakerCanadiandollar,asatDecember31,2018comparedtoDecember31,2017,increasedforeigncurrencydenominateddebt(mainlyU.S.dollars)by$501million.In2018,newaircraft-relatedborrowingsof$1,210millionwerelargelyoffsetbydebtrepaymentsof$1,167million.

2018 ANNUAL REPORT


AtDecember31,2018,adjustednetdebtof$5,858milliondecreased$258millionfromDecember31,2017asincreasesinlong-termdebtandfinanceleasebalancesof$533millionandcapitalizedoperatingleasebalancesof$112millionweremorethanoffsetbyanincreaseincash,cashequivalentsandshort-terminvestmentbalancesof$903million.AtDecember31,2018,AirCanada’sleverageratio(adjustednetdebttotrailing12-monthEBITDARratio)was2.1,unchangedfromDecember31,2017.

AtDecember31,2018,AirCanada’sweightedaveragecostofcapital(“WACC”),onapre-taxbasis,was7.2%(comparedto7.6%atDecember31,2017).WACCisbasedonanestimatebymanagementandconsistsofanestimatedcostofequityof20.0%andanaveragecostofdebtandfinanceleasesof4.4%(comparedtoanestimatedcostofequityof20.0%andanaveragecostofdebtandfinanceleasesof4.5%atDecember31,2017).

9.4.WORKINGCAPITAL

ThetablebelowprovidesinformationonAirCanada’sworkingcapitalbalancesasatDecember31,2018andasatDecember31,2017.

(Canadiandollarsinmillions)December 31,

2018December31,

2017$Change

Cash,cashequivalentsandshort-terminvestments $ 4,707 $ 3,804 $ 903Accountsreceivable 796 814 (18)Othercurrentassets 798 779 19Total current assets $ 6,301 $ 5,397 $ 904Accountspayableandaccruedliabilities 1,927 1,961 (34)Advanceticketsales 2,717 2,469 248Currentportionoflong-termdebtandfinanceleases 455 671 (216)Total current liabilities $ 5,099 $ 5,101 $ (2)Net working capital $ 1,202 $ 296 $ 906


Thenetworkingcapitalof$1,202millionatDecember31,2018representedanimprovementof$906millionfromDecember31,2017.

Thenetcashflowbenefitofpositiveoperatingresultsin2018morethanoffsettheimpactofnetcapitalexpenditures.Netcashoutflowrelatingtocapitalexpenditureswas$838million(afterdeductingproceedsdrawnonthedeliveryoffiveBoeing787and13Boeing737MAXaircraftof$1,210million,andproceedsonthesaleof25Embraer190aircraftof$293millionlesstherepaymentoftheassociateddebtof$144million).In2018,AirCanadaalsomadeanadditionaldebtrepaymentof$268millioninconjunctionwiththeamendmentofthe2016CreditFacility(refertosection9.3“AdjustedNetDebt”ofthisMD&Aforadditionalinformation)andpurchasedthreeBoeing737MAXaircraftusingcash.

2018 ANNUAL REPORT


9.5CONSOLIDATEDCASHFLOWMOVEMENTS

ThetablebelowprovidesthecashflowmovementsforAirCanadafortheperiodsindicated.


(Canadiandollarsinmillions) 2018 2017 $Change 2018 2017 $Change

Net cash flows from operating activities $ 360 $ 389 $ (29) $ 2,695 $ 2,738 $ (43)Proceedsfromborrowings - - - 1,210 733 477

Reductionoflong-termdebtandfinanceleaseobligations

(361) (240) (121) (1,170) (814) (356)

Sharespurchasedforcancellation (50) (35) (15) (73) (71) (2)Issueofshares - 2 (2) 5 9 (4)Financingfees (4) (11) 7 (12) (26) 14

Net cash flows used in financing activities

$ (415) $ (284) $ (131) $ (40) $ (169) $ 129

Short-terminvestments 36 (167) 203 (848) (998) 150

Additionstoproperty,equipmentandintangibleassets

(219) (432) 213 (2,197) (2,422) 225

Proceedsfromsaleofassets 1 2 (1) 11 5 6Proceedsfromsale-leasebackofassets - - - 293 740 (447)Other (1) (24) 23 47 (16) 63Net cash flows used in investing activities $ (183) $ (621) $ 438 $(2,694) $ (2,691) $ (3)

Effect of exchange rate changes on cash and cash equivalents

$ 16 $ 12 $ 4 $ 27 $ (23) $ 50

Increase (decrease) in cash and cash equivalents

$ (222) $ (504) $ 282 $ (12) $ (145) $ 133

ThefollowingtableprovidesthecalculationoffreecashflowforAirCanadafortheperiodsindicated.


(Canadiandollarsinmillions) 2018 2017 $Change 2018 2017 $Change

Net cash flows from operating activities $ 360 $ 389 $ (29) $ 2,695 $ 2,738 $ (43)

Additionstoproperty,equipmentandintangibleassets,netofproceedsfromsaleandleasebacktransactions

(219) (432) 213 (1,904) (1,682) (222)

Free cash flow (1) $ 141 $ (43) $ 184 $ 791 $ 1,056 $ (265)

(1) Freecashflowisanon-GAAPfinancialmeasureusedbyAirCanadaasanindicatorofthefinancialstrengthandperformanceofitsbusiness,indicatinghowmuchcashitisabletogeneratefromoperationsandaftercapitalexpenditures.Freecashflowiscalculatedasnetcashflowsfromoperatingactivitiesminusadditionstoproperty,equipmentandintangibleassets,andisnetofproceedsfromsaleandleasebacktransactions.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.

2018 ANNUAL REPORT


Free Cash Flow

Inthefourthquarterof2018,netcashflowsfromoperatingactivitiesof$360milliondecreased$29millionwhencomparedtothesamequarterin2017.Thecashflowbenefitofanimprovementinoperatingincomequarteroverquarterwasmorethanoffsetbyadecreaseincashfromworkingcapital.Freecashflowof$141millionincreased$184millionfromthefourthquarterof2017duetoalowerlevelofcapitalexpenditures.

In2018,netcashflowsfromoperatingactivitiesof$2,695milliondecreased$43millionwhencomparedto2017.In2018,freecashflowof$791milliondecreased$265millionfrom2017.In2018,AirCanadareceivedproceedsof$293millionfromthesaleandleasebackof25Embraer190aircraft.In2017,AirCanadareceivedproceedsof$740millionfromthesaleandleasebackoffourBoeing787aircraft.

Net Cash Flows from (used in) Financing Activities

Reductionoflong-termdebtandfinanceleaseobligationsamountedto$361millioninthefourthquarterof2018and$1,170millionforthefullyear2018whileproceedsfromborrowingswerenilinthefourthquarterof2018andtotaled$1,210millionin2018.

Refertosections9.4“WorkingCapital”,9.2“FinancialPosition”and9.3“AdjustedNetDebt”ofthisMD&Aforadditionalinformation.

9.6.CAPITALEXPENDITURESANDRELATEDFINANCINGARRANGEMENTS

Boeing 787 Aircraft

AsofthedateofthisMD&A,AirCanadahasoutstandingpurchasecommitmentswithTheBoeingCompany(“Boeing”)fortwoBoeing787aircrafttobedeliveredin2019.AirCanadaalsohaspurchaseoptionsfor13Boeing787aircraft(entitlingAirCanadatopurchaseaircraftbasedonpreviouslydeterminedpricinganddeliverypositions),andpurchaserightsfor10Boeing787aircraft(entitlingAirCanadatopurchaseaircraftbasedonBoeing’sthencurrentpricingandavailabledeliverypositions).

Boeing 737 MAX Aircraft

AirCanadahasanagreementwithBoeingforthepurchaseofBoeing737MAXaircraftwhichprovidesfor:

> Firmordersfor61737MAXaircraft,consistingof50737MAX8and11737MAX9aircraftwithsubstitutionrightsbetweenthemaswellasforthe737MAX7aircraft.

> Purchaseoptionsfor18Boeing737MAXaircraft.

> Certainrightstopurchaseanadditional30Boeing737MAXaircraft.

AsofthedateofthisMD&A,18Boeing737MAX8aircrafthavebeendelivered,withtheremaining43Boeing737MAXaircraftscheduledfordeliveryfrom2019to2024.

InApril2018,AirCanadaconcludedanamendmenttoitsBoeing737purchaseagreement,pursuanttowhichcertainaircraftdeliverypositionswereacceleratedandothersdeferred.Theamendmentacceleratesthedeliveryoffive737MAXaircraftbyoneyear,to2020,anddefersthedeliveryof11737MAXaircraftbyupto36months.

Subjecttocertainconditions,AirCanadaalsohasfinancingcommitmentscovering25firmBoeing737MAXaircraftscheduledfordeliveryin2020,2023and2024.Thefinancingtermsarefor80%oftheaircraftdeliverypriceandthetermtomaturityis10yearswithmortgage-stylerepayments.

2018 ANNUAL REPORT


Airbus A220-300 Aircraft

InJune2016,AirCanadaandBombardierInc.(“Bombardier”)finalizedapurchaseagreementwhichincludesafirmorderfor45AirbusA220-300aircraft(formerlycalledBombardierC-SeriesCS300aircraft)andoptionsforanadditional30AirbusA220-300aircraft.Deliveriesarescheduledtobegininlate2019andextendto2022.Thefirst25aircraftondeliveryareexpectedtoreplaceAirCanada’sexistingmainlinefleetofEmbraer190aircraft,withincrementalaircraftsupportingAirCanada’shubandnetworkgrowth.

Reconfiguration of Airbus A330 Aircraft

Inordertoprovidecustomerswithaproductthatisconsistentacrossitswide-bodyfleet,AirCanadaplansonreconfiguring12AirbusA330aircraft(eightofwhicharecurrentlyinserviceandfourscheduledtobeaddedin2019)tothenewBoeing787state-of-the-artstandard.ThereconfigurationoftheAirbusA330aircraftisexpectedtobegininlate2019forcompletioninthefirsthalfof2020.Thecapitalexpenditurerelatedtothisrefurbishmentprogram(whichisincludedintheprojectedcommittedexpendituresinthetablebelow)isapproximately$275million.

Capital Commitments

Asoutlinedinthetablebelow,theestimatedaggregatecostofthefuturefirmBoeing787,Boeing737MAXandAirbusA220-300aircraftdeliveriesandothercapitalpurchasecommitmentsasatDecember31,2018approximates$6,076million.ThetablebelowalsoincludestheimpactoftheamendmenttotheBoeing737purchaseagreementdiscussedabove.

(Canadiandollarsinmillions) 2019 2020 2021 2022 2023 Thereafter Total

Projectedcommittedexpenditures

$ 2,382 $ 1,556 $ 815 $ 753 $ 375 $ 195 $ 6,076

Projectedplannedbutuncommittedexpenditures

324 441 440 228 186Not

availableNot

available

Projectedplannedbutuncommittedcapitalizedmaintenance(1)

212 183 166Not

availableNot

availableNot

availableNot

available

Total projected expenditures (2) $ 2,918 $ 2,180 $ 1,421 $ 981 $ 561

Not available

Not available

(1) Futurecapitalizedmaintenanceamountsfor2022and2023andbeyondarenotyetdeterminable.(2)U.S.dollaramountsareconvertedusingtheDecember31,2018closingexchangerateofUS$1=C$1.3637.Theestimatedaggregatecost

ofaircraftisbasedondeliverypricesthatincludeestimatedescalationand,whereapplicable,deferredpricedeliverypaymentinterestcalculatedbasedonthe90-dayU.S.LIBORrateatDecember31,2018.

2018 ANNUAL REPORT


9.7.PENSIONFUNDINGOBLIGATIONS

AirCanadamaintainsseveraldefinedbenefitpensionplans,includingdomesticregisteredpensionplans,supplementalpensionplansandinternationalpensionplans.AirCanadaalsohasseveraldefinedcontributionpensionplansaswellasplansprovidingotherretirementandpost-employmentbenefitstoitsemployees.

AsatJanuary1,2018,theaggregatesolvencysurplusinthedomesticregisteredpensionplanswas$2.6billion.Basedonpreliminaryestimates,includingactuarialassumptions,asatJanuary1,2019,theaggregatesolvencysurplusinAirCanada’sdomesticregisteredpensionplansisprojectedtobe$2.4billion.ThefinalvaluationstobemadeasatJanuary1,2019willbecompletedinthefirsthalfof2019.Basedonpreliminaryestimates,AirCanadadoesnotexpecttomakeanypastservicepaymentsin2019.

Aspermittedbyapplicablelegislationandsubjecttoapplicableplanrules,amountsinexcessof105%onasolvencybasismaybeusedtoreducecurrentservicecontributionsunderthedefinedbenefitcomponentortofundtheemployercontributiontoadefinedcontributioncomponentwithinthesamepensionplan.

Onacashbasis,totalemployerpensionfundingcontributions(includingtheinternationalandsupplementalplans)amountedto$94millionin2018,asdescribedinthetablebelow.

(Canadiandollarsinmillions) 2018

Currentservicedomesticregisteredplans $ 1Otherpensionarrangements(1) 93Total employer pension funding contributions $ 94

(1) Includesretirementcompensationarrangements,supplementalplansandinternationalplans.

Onacashbasis,totalpensionfundingcontributions(includingtheinternationalandsupplementalplans)areforecastedtobe$93millionin2019,asdescribedinthetablebelow.

(Canadiandollarsinmillions) 2019

Currentservicedomesticregisteredplans $ 2Otherpensionarrangements(1) 91Total projected employer pension funding contributions $ 93

(1) Includesretirementcompensationarrangements,supplementalplansandinternationalplans.

AsatDecember31,2018,takingintoaccounttheeffectoffinancialinstrumentriskmanagementtools,approximately81%ofAirCanada’spensionliabilitieswerematchedwithfixedincomeproductstomitigateasignificantportionoftheinterestrate(discountrate)risk.AirCanadamaycontinuetoincreasethepercentageoffixedincomeproductsmatchedtopensionliabilities,subjecttofavourablemarketconditions.

2018 ANNUAL REPORT


9.8.CONTRACTUALOBLIGATIONS

ThetablebelowprovidesAirCanada’scontractualobligationsasatDecember31,2018,includingthoserelatingtointerestandprincipalrepaymentobligationsonAirCanada’slong-termdebtandfinanceleaseobligations,operatingleaseobligationsandcommittedcapitalexpenditures.

(Canadiandollarsinmillions) 2019 2020 2021 2022 2023 Thereafter Total

PrincipalLong-termdebtobligations $407 $640 $ 1,003 $ 342 $ 1,450 $ 2,731 $ 6,573Financeleaseobligations 48 50 17 15 16 41 187Total principal obligations $ 455 $ 690 $ 1,020 $ 357 $ 1,466 $ 2,772 $ 6,760 Interest Long-termdebtobligations 273 258 214 176 151 346 1,418Financeleaseobligations 14 10 6 5 4 10 49Total interest obligations $ 287 $ 268 $ 220 $ 181 $ 155 $ 356 $ 1,467

Total long-term debt and finance lease obligations

$ 742 $ 958 $ 1,240 $ 538 $ 1,621 $ 3,128 $ 8,227

Operating lease obligations $ 679 $ 527 $ 383 $ 294 $ 230 $ 868 $ 2,981

Committed capital expenditures

$ 2,382 $ 1,556 $ 815 $ 753 $ 375 $ 195 $ 6,076

Total contractual obligations (1) $ 3,803 $ 3,041 $ 2,438 $ 1,585 $ 2,226 $ 4,191 $ 17,284

(1)Totalcontractualobligationsexcludecommitmentsforgoodsandservicesrequiredintheordinarycourseofbusiness.Alsoexcludedarelong-termliabilitiesotherthanlong-termdebtandfinanceleaseobligationsduetoreasonsofuncertaintyoftimingofcashflowsanditemsthatarenon-cashinnature.

Covenants in Credit Card Agreements

AirCanada’sprincipalcreditcardprocessingagreementsforcreditcardprocessingservicescontaintriggeringeventsuponwhichAirCanadaisrequiredtoprovidetheapplicablecreditcardprocessorwithcashdeposits.Theobligationstoprovidecashdepositsandtherequiredamountofdepositsareeachbaseduponamatrixmeasuring,onaquarterlybasis,bothafixedchargecoverageratioforAirCanadaandtheunrestrictedcash,cashequivalentsandshort-terminvestmentsofAirCanada.In2018,AirCanadamadenocashdepositsundertheseagreements(nilin2017).

2018 ANNUAL REPORT


9.9.SHAREINFORMATION

TheissuedandoutstandingsharesofAirCanada,alongwithsharespotentiallyissuable,asofthedatesindicatedbelow,areasfollows:

December 31, 2018

December31,2017

Issued and outstanding shares

Variablevotingshares 125,214,350 115,986,084Votingshares 145,515,561 157,090,562Total issued and outstanding shares 270,729,911 273,076,646

Class A variable voting and Class B voting shares potentially issuable

Stockoptions 6,014,464 6,121,252Total shares potentially issuable 6,014,464 6,121,252Total outstanding and potentially issuable shares 276,744,375 279,197,898

Issuer Bid

InMay2018,AirCanadareceivedapprovalfromtheTorontoStockExchangefortherenewalofitsnormalcourseissuerbidforitsClassAvariablevotingsharesandClassBvotingshares(collectivelythe“shares”),authorizing,betweenMay31,2018andMay30,2019,thepurchaseofupto24,040,243shares,representing10%ofAirCanada’spublicfloatasatMay17,2018.In2018,AirCanadapurchased,forcancellation3,013,822sharesatanaveragecostof$24.11pershareforaggregateconsiderationof$73million.AtDecember31,2018,atotalof21,940,639sharesremainedavailableforrepurchaseundertheexistingissuerbid.

2018 ANNUAL REPORT


10. QUARTERLY FINANCIAL DATA

ThetablebelowsummarizesquarterlyfinancialresultsforAirCanadaforthelasteightquarters.

(Canadiandollarsinmillions,exceptwhereindicated)

2017(1) 2018

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Passenger $ 3,120 $ 3,550 $ 4,514 $ 3,409 $ 3,489 $ 3,921 $ 5,018 $ 3,795Cargo 148 168 194 198 168 200 218 217Other 374 192 172 213 414 212 179 234Operating revenues 3,642 3,910 4,880 3,820 4,071 4,333 5,415 4,246 Aircraftfuel 659 701 832 735 825 964 1,222 958Regionalairlinesexpense

Aircraftfuel 95 96 109 112 114 135 149 133Other 537 552 553 563 561 607 568 575

Wages,salaries&benefits 644 663 690 674 700 711 743 719Airportandnavigationfees 210 230 264 201 221 237 281 225Aircraftmaintenance 228 226 241 243 256 220 277 250Depreciation,amortizationandimpairment 228 242 241 245 267 278 268 267Salesanddistributioncosts 181 188 232 169 189 199 237 182Groundpackagecosts 256 103 73 106 276 114 86 126Aircraftrent 122 130 125 126 125 123 137 133Cateringandonboardservices 85 97 112 89 96 108 125 104Communicationsandinformationtechnology 71 58 63 62 79 67 79 69Specialitems 30 - - - - - - -Other 326 332 369 362 376 344 403 383Operating expenses 3,672 3,618 3,904 3,687 4,085 4,107 4,575 4,124Operating income (loss) (30) 292 976 133 (14) 226 840 122Foreignexchangegain(loss) 70 68 44 (62) (112) (25) 89 (269)Interestincome 12 14 16 18 20 24 32 32Interestexpense (79) (80) (73) (79) (83) (84) (80) (84)Interestcapitalized 9 9 9 9 13 7 7 8

Netfinancingexpenserelatingtoemployeebenefits

(16) (16) (15) (18) (12) (13) (13) (12)

Gain(loss)onfinancialinstrumentsrecordedatfairvalue

- 7 17 (1) 1 (9) 10 (3)

Gainonsaleandleasebackofassets 26 26 - - - - - -

Gain(loss)ondebtsettlementsandmodifications

- - (3) 24 11 (1) (1) -

Lossondisposalofassets - - - - - (186) (2) -Other (5) (6) (6) (4) (8) (10) (6) (10)Total non-operating income (expense) 17 22 (11) (113) (170) (297) 36 (338)Income (loss) before income taxes (13) 314 965 20 (184) (71) 876 (216)Incometax(expense)recovery - (3) 758 (12) 14 (6) (231) (15)Net income (loss) $ (13) $ 311 $ 1,723 $ 8 $ (170) $ (77) $ 645 $ (231)Diluted earnings (loss) per share $ (0.05) $ 1.13 $ 6.22 $ 0.02 $ (0.62) $ (0.28) $ 2.34 $ (0.85)

EBITDAR (2) $ 366 $ 681 $ 1,360 $ 521 $ 397 $ 646 $ 1,265 $ 543Adjusted pre-tax income (loss) (2) $ (63) $ 229 $ 922 $ 77 $ (72) $ 163 $ 793 $ 68Adjusted net income (loss) (2) $ (63) $ 226 $ 922 $ 60 $ (52) $ 114 $ 561 $ 54Adjusted earnings (loss) per share – diluted (2) $ (0.23) $ 0.82 $ 3.33 $ 0.22 $ (0.19) $ 0.41 $ 2.03 $ 0.20

(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amounts.(2)EBITDAR,adjustedpre-taxincome(loss),adjustednetincome(loss)andadjustedearnings(loss)pershare–dilutedarenon-GAAPfinancialmeasures.Reconciliationsof

thesemeasurestocomparableGAAPmeasurescanbefoundinsection20“Non-GAAPFinancialMeasures”ofthisMD&AandinAirCanada’sMD&Areports,availableataircanada.com.

2018 ANNUAL REPORT


Thetablebelowprovidesabreakdownofthemostsignificantitemsincludedinregionalairlinesexpenseforthelasteightquarters.


2017 2018

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Capacitypurchasefees $ 308 $ 314 $ 315 $ 330 $ 319 $ 360 $ 318 $ 336Aircraftfuel 95 96 109 112 114 135 149 133Airportandnavigationfees 69 73 80 71 69 76 78 73Salesanddistributioncosts 37 40 34 35 34 41 44 34Depreciation,amortizationandimpairment 6 7 8 7 9 9 9 11Aircraftrent 10 10 10 10 10 10 11 10Other 107 108 106 110 120 111 108 111Total regional airlines expense $ 632 $ 648 $ 662 $ 675 $ 675 $ 742 $ 717 $ 708

ThetablebelowprovidesmajorquarterlyoperatingstatisticsforAirCanadaforthelasteightquarters.

2017(1) 2018

System Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

PassengerPRASM(cents) 13.6 14.0 14.5 14.1 14.0 14.4 15.1 14.8CASM(cents) 16.0 14.3 12.6 15.2 16.4 15.1 13.8 16.1AdjustedCASM(cents)(2) 11.5 10.7 9.3 11.3 11.5 10.6 9.4 11.4Fuelcostperlitre(cents)(3) 63.2 61.3 59.4 67.5 73.3 80.3 83.0 84.3

(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amounts.(2)AdjustedCASMisanon-GAAPfinancialmeasure.AreconciliationofthismeasuretoacomparableGAAPmeasurecanbefoundinsection20“Non-GAAPFinancial

Measures”ofthisMD&AandinAirCanada’sMD&Areports,availableataircanada.com.(3)Includesaircraftfuelexpenserelatedtoregionalairlineoperations.Includesfuelhandlingexpenses.

2018 ANNUAL REPORT


ThetablebelowprovidesAirCanada’srevenuepassengermiles(RPMs),availableseatmiles(ASMs)andpassengerloadfactors,onasystem-basisandbymarket,forthelasteightquarters.

2017 2018

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

SystemRPMs(millions) 18,341 20,928 26,472 19,396 20,440 22,654 28,465 20,801ASMs(millions) 22,894 25,357 31,050 24,191 24,862 27,269 33,137 25,598Passengerloadfactor(%) 80.1 82.5 85.3 80.2 82.2 83.1 85.9 81.3%

DomesticRPMs(millions) 4,101 4,875 6,130 4,607 4,226 5,003 6,339 4,684ASMs(millions) 5,108 5,837 7,173 5,584 5,280 6,026 7,482 5,667Passengerloadfactor(%) 80.3 83.5 85.4 82.5 80.0 83.0 84.7 82.7%

U.S. transborderRPMs(millions) 3,782 3,609 3,951 3,408 4,037 3,848 4,172 3,734ASMs(millions) 4,687 4,376 4,683 4,252 4,945 4,673 4,962 4,662Passengerloadfactor(%) 80.7 82.5 84.4 80.1 81.6 82.3 84.1 80.1%

AtlanticRPMs(millions) 3,891 6,131 9,406 5,076 4,573 7,084 10,642 5,813ASMs(millions) 5,248 7,661 11,087 6,582 5,753 8,571 12,231 7,206Passengerloadfactor(%) 74.1 80.0 84.8 77.1 79.5 82.7 87.0 80.6%

PacificRPMs(millions) 3,943 4,671 5,471 4,501 4,572 4,936 5,630 4,514ASMs(millions) 4,862 5,540 6,412 5,586 5,447 5,829 6,484 5,541Passengerloadfactor(%) 81.1 84.3 85.3 80.6 83.9 84.7 86.8 81.5%

OtherRPMs(millions) 2,624 1,642 1,514 1,804 3,032 1,783 1,682 2,056ASMs(millions) 2,989 1,943 1,695 2,187 3,437 2,170 1,978 2,522Passengerloadfactor(%) 87.8 84.5 89.3 82.5 88.2 82.1 85.0 81.6%

2018 ANNUAL REPORT


11. SELECTED ANNUAL INFORMATION

ThefollowingtableprovidesselectedannualinformationforAirCanadafortheyears2016through2018.

Full Year

(Canadiandollarsinmillions,exceptpersharefigures) 2018 2017(1) 2016(1)

Operatingrevenues $ 18,065 $16,252 $ 14,677Operatingexpenses(2) 16,891 14,881 13,332Operating income 1,174 1,371 1,345Incomebeforeincometaxes 405 1,286 877Recoveryof(provisionfor)incometaxes(3) (238) 743 (1)Net income $ 167 $ 2,029 $ 876EBITDAR (4) $ 2,851 $ 2,928 $ 2,768Adjusted pre-tax income (4) $ 952 $ 1,165 $ 1,148Adjusted net income (4) $ 677 $ 1,145 $ 1,147Basic earnings per share $ 0.61 $ 7.44 $ 3.16Diluted earnings per share $ 0.60 $ 7.31 $ 3.10Adjusted earnings per share – diluted (4) $ 2.45 $ 4.11 $ 4.06Cash, cash equivalents and short-term investments $ 4,707 $ 3,804 $ 2,979Total assets (5) $ 19,197 $ 17,782 $ 15,114Total long-term liabilities (6) $ 10,520 $ 9,930 $ 10,178Total liabilities $ 15,164 $ 14,360 $ 13,895

(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amounts.2016amountshavenotbeenrestatedfortheadoptionofthisnewaccountingstandard.

(2)In2017,AirCanadarecordedaprovisionof$30millionrelatingtoafinewhichwasreinstatedbyadecisionoftheEuropeanCommissionpertainingtocargoinvestigations.In2016,AirCanadarecordedapastservicecostexpenseof$91milliontoreflecttheestimatedcostofpensionincreasesapplicabletoACPA-representedpilotswhoparticipateinadefinedbenefitplan.

(3)In2017,AirCanadarecordedataxrecoveryof$743million(representingadeferredincometaxrecoveryof$759millionandacurrentincometaxexpenseof$16million).Thisdeferredincometaxrecoverywasexcludedfromadjustednetincomeasitreflectedaone-timerecognitionofpreviouslyunrecognizedincometaxassets.

(4)EBITDAR,adjustedpre-taxincome,adjustednetincomeandadjustedearningspershare–dilutedarenon-GAAPfinancialmeasures.ReconciliationsofthesemeasurestocomparableGAAPmeasurescanbefoundinsection20“Non-GAAPFinancialMeasures”ofthisMD&AandinAirCanada’sMD&Areports,availableataircanada.com.

(5)In2017,AirCanadarecordedadeferredincometaxassetof$456million.(6)Totallong-termliabilitiesincludelong-termdebt(includingcurrentportion)andfinanceleases,pensionandotherbenefitliabilities,

maintenanceprovisionsandotherlong-termliabilities.

2018 ANNUAL REPORT


12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Summary of Gain (Loss) on Financial Instruments Recorded at Fair Value

Thefollowingisasummaryofgains(losses)onfinancialinstrumentsrecordedatfairvalueincludedinnon-operatingincome(expense)onAirCanada’sconsolidatedstatementofoperationsfortheperiodsindicated.


(Canadiandollarsinmillions) 2018 2017 2018 2017

Shareforwardcontracts $ (3) $ - $ - $ 26Fuelderivatives - (1) (1) (3)Financial instruments recorded at fair value $ (3) $ (1) $ (1) $ 23

Risk Management

Underitsriskmanagementpolicy,AirCanadamanagesitsfuelpricerisk,foreignexchangeriskandinterestrateriskthroughtheuseofvariousfinancialderivativeinstruments.AirCanadausestheseinstrumentssolelyforriskmanagementpurposesandnotforgeneratingtradingprofit.Assuch,anychangeincashflowsassociatedwithderivativeinstrumentsisdesignedtobeaneconomichedgeandoffsetbychangesincashflowsoftherelevantriskbeinghedged.

Thefairvaluesofderivativeinstrumentsrepresenttheamountoftheconsiderationthatcouldbeexchangedinanarm’slengthtransactionbetweenwillingpartieswhoareundernocompulsiontoact.Thefairvalueofthesederivativesisdeterminedusingpricesinactivemarkets,whereavailable.Whennosuchmarketisavailable,valuationtechniquessuchasdiscountedcashflowanalysisareapplied.Thevaluationtechniquesincorporateallfactorsthatwouldbeconsideredinsettingaprice,includingAirCanada’sandthecounterparty’srespectivecreditrisk.

Fuel Price Risk Management

Fuelpriceriskistheriskthatfuturecashflowswillfluctuatebecauseofchangesinjetfuelprices.Inordertomanageitsexposuretojetfuelpricesandtohelpmitigatevolatilityinoperatingcashflows,AirCanadaentersintoderivativecontractswithfinancialintermediaries.AirCanadamayusederivativecontractsbasedonjetfuel,heatingoilandcrude-oil.AirCanada’spolicypermitshedgingofupto75%oftheprojectedjetfuelpurchasesforthecurrentcalendaryear,50%oftheprojectedjetfuelpurchasesforthenextcalendaryear,and25%ofprojectedjetfuelpurchasesforanycalendaryearthereafter.Thesearemaximum(butnotmandated)limits.Thereisnominimummonthlyhedgingrequirement.AirCanadaperformsregularreviewstoassessmarketconditionsandadjustitshedgingstrategywheremanagementconsidersitwarranted.

In2018:

> Hedginglossesonthesettlementoffuelderivativesof$19millionandtheassociatedpremiumcostsof$17million,forahedginglossof$36millionwerereclassifiedfromothercomprehensiveincometoaircraftfuelexpense(netfuelhedginglossof$2millionwasreclassifiedfromothercomprehensiveincometoaircraftfuelexpensein2017).Nohedgeineffectivenesswasrecorded.

> AirCanadapurchasedcrude-oilcalloptionsandswapscoveringaportionof2018fuelexposure.Thecashpremiumrelatedtothesecontractswas$17million($18millionin2017for2017exposures).

> Fuelderivativecontractscashsettledwithafairvalueof$19millioninfavourofthecounterparties($26millioninfavourofAirCanadain2017).

TherewerenooutstandingfuelderivativesasatDecember31,2018andDecember31,2017.

2018 ANNUAL REPORT


Foreign Exchange Risk Management

AirCanada’sfinancialresultsarereportedinCanadiandollars,whilealargeportionofitsexpenses,debtobligationsandcapitalcommitmentsareinforeigncurrencies,primarilyU.S.dollars.Foreignexchangeriskistheriskthatfluctuationsinforeignexchangeratesmayhaveonoperatingresultsandcashflows.AirCanada’sriskmanagementobjectiveistoreducecashflowriskrelatedtoforeigndenominatedcashflows.

AirCanadageneratescertainsalesinU.S.dollarsandinotherforeigncurrencieswhichareconvertedtoU.S.dollarsundertheCorporation’sriskmanagementprogram.In2018,thesenetoperatingcashinflowstotaledapproximatelyUS$4.2billionandU.S.denominatedoperatingcostsamountedtoapproximatelyUS$6.4billion.Non-operatingcashoutflowsinU.S.dollars,primarilyrelatedtointerestpaymentsonU.S.dollardenominateddebtandnetfinancingoutflows,amountedtoapproximatelyUS$1.9billion.For2018,thisresultedinaU.S.dollarnetcashflowexposureofapproximatelyUS$4.1billion.

AirCanadahasatargetcoverageof70%onarolling18-monthbasistomanagethenetU.S.dollarcashflowexposuredescribedaboveutilizingthefollowingriskmanagementstrategies:

> HoldingU.S.dollarcashreservesasaneconomichedgeagainstchangesinthevalueoftheU.S.dollar.U.S.dollarcashandshort-terminvestmentbalancesasatDecember31,2018amountedto$863million(US$635million)($686million(US$542million)asatDecember31,2017).Aportionofthecashandinvestmentreservesareaneconomichedgeagainstlong-termU.S.dollardebtwhiletheremainderofthecashisoperationalcashandinvestmentreserveswhichareappliedagainsttherolling18-monthnetU.S.dollarcashflowexposure.In2018,againof$62million(lossof$58millionin2017)wasrecordedinforeignexchangegain(loss)reflectingthechangeinCanadianequivalentmarketvalueoftheU.S.dollarcash,cashequivalentsandshort-terminvestmentbalancesheld.

> LockingintheforeignexchangeratethroughtheuseofavarietyofforeignexchangederivativeswhichhavematuritydatescorrespondingtotheforecasteddatesofU.S.dollarnetoutflows.

Thelevelofforeignexchangederivativesenteredintoandtheirrelatedmaturitydatesaredependentuponanumberoffactors,whichincludetheamountofforeignrevenueconversionavailable,U.S.dollarnetcashoutflows,aswellastheamountattributedtoaircraftanddebtpayments.BasedonthenotionalamountofcurrencyderivativesoutstandingatDecember31,2018,asfurtherdescribedbelow,approximately77%ofnetU.S.cashoutflowsarehedgedfor2019and48%for2020,resultinginderivativecoverageof68%overthenext18months.OperationalU.S.dollarcashandinvestmentreservescombinedwithderivativecoverageresultsin75%coverage.

AsatDecember31,2018,AirCanadahadoutstandingforeigncurrencyoptionsandswapagreements,settlingin2019and2020,topurchaseatmaturity$4,987million(US$3,659million)ofU.S.dollarsataweightedaveragerateof$1.2645perUS$1.00(2017–$3,400million(US$2,704million)withsettlementsin2018and2019ataweightedaveragerateof$1.2703per$1.00U.S.dollar).AirCanadaalsohasprotectioninplacetosellaportionofitsexcessEuros,Sterling,YEN,andAUD(EUR€103million,GBP£208million,JPY¥25,922million,andAUD$105million)whichsettlein2019and2020atweightedaverageratesof€1.1910,£1.3567,¥0.0092,andAUD$0.7448per$1.00U.S.dollar,respectively(asatDecember31,2017-EUR€101million,GBP£105million,JPY¥8,623million,CNY¥41million,andAUD$32millionwithsettlementin2018atweightedaverageratesof€1.1664,£1.3259,¥0.0090,¥0.1468andAUD$0.7576respectivelyper$1.00U.S.dollar).

2018 ANNUAL REPORT


Thehedgingstructuresputinplacehavevariousoptionpricingfeatures,suchasknock-outtermsandprofitcaplimitationsand,basedontheassumedvolatilityusedinthefairvaluecalculation,thenetfairvalueoftheseforeigncurrencycontractsasatDecember31,2018was$33millioninfavourofthecounterparties(2017–$215millioninfavourofthecounterparties).Thesederivativeinstrumentshavenotbeendesignatedashedgesforaccountingpurposesandarerecordedatfairvalue.In2018,againof$245millionwasrecordedinforeignexchangegain(loss)relatedtothesederivatives(2017–$274millionloss).In2018,foreignexchangederivativecontractscashsettledwithanetfairvalueof$63millioninfavourofAirCanada(2017–$55millioninfavourofthecounterparties).

Interest Rate Risk Management

Interestrateriskistheriskthatthefairvalueorfuturecashflowsofafinancialinstrumentwillfluctuatebecauseofchangesinmarketinterestrates.

AirCanadaentersintobothfixedandfloatingratedebtandleasescertainassetswheretherentalamountfluctuatesbasedonchangesinshort-terminterestrates.AirCanadamanagesinterestrateriskonaportfoliobasisandseeksfinancingtermsinindividualarrangementsthataremostadvantageoustakingintoaccountallrelevantfactors,includingcreditmargin,termandbasis.TheriskmanagementobjectiveistominimizethepotentialforchangesininterestratestocauseadversechangesincashflowstoAirCanada.Thecash,cashequivalentsandshort-terminvestmentportfolio,whichearnsafloatingrateofreturn,isaneconomichedgeforaportionofthefloatingratedebt.

TheratiooffixedtofloatingrateobligationsoutstandingisdesignedtomaintainflexibilityinAirCanada’scapitalstructureandisbaseduponalong-termobjectiveof60%fixedand40%floatingbutallowstheflexibilitytoadjusttoprevailingmarketconditions.TheratioatDecember31,2018,was81%fixedand19%floating(73%and27%,respectively,asatDecember31,2017).

2018 ANNUAL REPORT


13. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

CriticalaccountingestimatesarethoseestimatesofmanagementthataremostimportanttotheportrayalofAirCanada’sfinancialconditionandresultsofoperations.Theyrequiremanagement’smostdifficult,subjectiveorcomplexJudgements,oftenbecauseoftheneedtomakeestimatesandJudgementsabouttheeffectofmattersthatareinherentlyuncertain.ActualresultscoulddifferfromthoseestimatesandJudgementsunderdifferentassumptionsorconditions.

AirCanadahasidentifiedthefollowingareasthatdependoncriticalaccountingestimatesutilizedinthepreparationofitsconsolidatedfinancialstatements.

Employee Future Benefits

AirCanadamaintainsseveraldefinedbenefitplansprovidingpension,otherretirementandpost-employmentbenefitstoitsemployees.ThecostandrelatedliabilitiesofAirCanada’spensions,otherpost-retirementandpost-employmentbenefitprogramsaredeterminedusingactuarialvaluations.Theactuarialvaluationsinvolveassumptions,includingdiscountrates,futuresalaryincreases,mortalityratesandfuturebenefitincreases.Also,duetothelong-termnatureoftheseprograms,suchestimatesaresubjecttosignificantuncertainty.

Assumptions

ManagementisrequiredtomakesignificantestimatesaboutactuarialandfinancialassumptionstodeterminethecostandrelatedliabilitiesofAirCanada’semployeefuturebenefits.

FinancialAssumptions

Discount RateThediscountrateusedtodeterminethepensionobligationwasdeterminedbyreferencetomarketinterestratesoncorporatebondsrated“AA”orbetterwithcashflowsthatapproximatethetimingandamountofexpectedbenefitpayments.

Futureincreasesincompensationarebaseduponthecurrentcompensationpolicies,labourandemploymentagreementsandeconomicforecasts.

ThesignificantweightedaverageassumptionsusedtodetermineAirCanada’saccruedbenefitobligationsandcostareasfollows:

Pension Benefits

Other Employee Future Benefits

2018 2017 2018 2017

Discount rate used to determine:

NetinterestonthenetbenefitobligationfortheyearendedDecember31

3.60% 3.90% 3.60% 3.90%

ServicecostfortheyearendedDecember31 3.70% 4.10% 3.70% 4.10%AccruedbenefitobligationasatDecember31 3.81% 3.60% 3.81% 3.60%

Rate of future increases in compensation used to determine:

AccruedbenefitcostfortheyearendedDecember31

2.50% 2.50%Not

applicableNot

applicable

AccruedbenefitobligationasatDecember31

2.50% 2.50%Not

applicableNot

applicable

2018 ANNUAL REPORT


Sensitivity Analysis

Sensitivityanalysisisbasedonchangingoneassumptionwhileholdingallotherassumptionsconstant.Inpractice,thismaybeunlikelytooccur,andchangesinsomeoftheassumptionsmaybecorrelated.Whencalculatingthesensitivityofthedefinedbenefitobligationtovariationsinsignificantactuarialassumptions,thesamemethod(presentvalueofthedefinedbenefitobligationcalculatedwiththeprojectedunitcreditmethodattheendofthereportingperiod)hasbeenappliedasthatusedforcalculatingtheliabilityrecognizedintheconsolidatedstatementoffinancialposition.

Sensitivityanalysison2018pensionexpenseandnetfinancingexpenserelatingtopensionbenefitliabilities,basedondifferentactuarialassumptionswithrespecttodiscountrateissetoutbelow.Theeffectsoneachpensionplanofachangeinanassumptionareweightedproportionatelytothetotalplanobligationtodeterminethetotalimpactforeachassumptionpresented.


0.25 Percentage Point

Decrease Increase

Discount rate on obligation assumption Pensionexpense $ 22 $ (21)Netfinancingexpenserelatingtopensionbenefitliabilities 23 (21)Total $ 45 $ (42)Increase (decrease) in pension obligation $ 703 $ (680)

Theincrease(decrease)inthepensionobligationfora0.25percentagepointchangeinthediscountraterelatestothegrossamountofthepensionliabilitiesandisbeforetheimpactofanychangeinplanassets.AsatDecember31,2018,approximately81%ofAirCanada’spensionliabilitieswerematchedwithfixedincomeproductstomitigateasignificantportionoftheinterestrate(discountrate)risk.

Anincreaseofone-yearlifeexpectancywouldincreasethepensionbenefitobligationby$478million.

Assumedhealthcarecosttrendrateshaveasignificanteffectontheamountsreportedforthehealthcareplans.A5.5%annualrateofincreaseinthepercapitacostofcoveredhealthcarebenefitswasassumedfor2018(2017–5.8%).Therateisassumedtodecreasegraduallyto5%by2020(2017–assumedtodecreasegraduallyto5%by2020).Aonepercentagepointincreaseinassumedhealthcaretrendrateswouldhaveincreasedthetotalofcurrentserviceandinterestcostsby$4millionandtheobligationby$55million.Aonepercentagepointdecreaseinassumedhealthcaretrendrateswouldhavedecreasedthetotalofcurrentserviceandinterestcostsby$4millionandtheobligationby$58million.

A0.25percentagepointdecreaseindiscountrateforotheremployeefuturebenefitswouldhaveincreasedthetotalofcurrentandinterestcostsbylessthan$1millionandtheobligationby$47million.A0.25percentagepointincreaseindiscountratewouldhavedecreasedthetotalofcurrentandinterestcostsbylessthan$1millionandtheobligationby$44million.

Depreciation and Amortization Period for Long-lived Assets

AirCanadamakesestimatesabouttheexpectedusefullivesoflong-livedassetsandtheexpectedresidualvalueoftheassetsbasedontheestimatedcurrentandfuturefairvaluesoftheassets,AirCanada’sfleetplansandthecashflowstheygenerate.Changestotheseestimates,whichcanbesignificant,couldbecausedbyavarietyoffactors,includingchangestomaintenanceprograms,changesinjetfuelpricesandotheroperatingcosts,changesinutilizationoftheaircraft,andchangingmarketpricesfornewandusedaircraftofthesameorsimilartypes.Estimatesandassumptionsareevaluatedatleastannually.Generally,theseadjustmentsareaccountedforonaprospectivebasis,throughdepreciationandamortizationexpense.Forthepurposesofsensitivityanalysisontheseestimates,a50%reductiontoresidualvaluesonaircraftwithremainingusefullivesgreaterthanfiveyearsresultsinanincreaseof$14milliontoannualdepreciationexpense.Foraircraftwithshorterremainingusefullives,theresidualvaluesarenotexpectedtochangesignificantly.

2018 ANNUAL REPORT


Impairment Considerations of Long-lived Assets

Long-livedassetsincludepropertyandequipment,definitelivedintangibleassets,indefinitelivedintangibleassetsandgoodwill.Assetsthathaveanindefiniteusefullife,includinggoodwill,aretestedannuallyforimpairmentorwheneventsorcircumstancesindicatethatthecarryingvaluemaynotberecoverable.Assetsthataresubjecttodepreciationoramortizationarereviewedforimpairmentwhenevereventsorchangesincircumstancesindicatethatthecarryingamountmaynotberecoverable.Whenrequired,animpairmenttestisperformedbycomparingthecarryingamountoftheassetorcashgeneratingunittotheirrecoverableamount.Recoverableamountiscalculatedasthehigherofanasset’sorcash-generatingunit’sfairvaluelesscoststodisposeanditsvalueinuse.Forthepurposeofassessingimpairment,assetsaregroupedatthelowestlevelsforwhichthereareseparatelyidentifiablecashflows(cash-generatingunitsorCGUs).Managementhasdeterminedthattheappropriatelevelforassessingimpairmentsisatthenarrow-bodyandwide-bodyfleetlevelsforaircraftandrelatedassetssupportingtheoperatingfleet.Parkedaircraftnotusedinoperationsandaircraftleasedorsubleasedtothirdpartiesareassessedforimpairmentattheindividualassetlevel.Fairvaluelesscoststodisposemaybecalculatedbaseduponadiscountedcashflowanalysis,whichrequiresmanagementtomakeanumberofsignificantmarketparticipantassumptionsincludingassumptionsrelatingtofutureoperatingplans,discountratesandfuturegrowthrates.Animpairmentlossisrecognizedfortheamountbywhichtheasset’scarryingamountexceedsitsrecoverableamount.

Maintenance Provisions

Therecordingofmaintenanceprovisionsrelatedtoreturnconditionsonaircraftleasesrequiresmanagementtomakeestimatesofthefuturecostsassociatedwiththemaintenanceeventsrequiredundertheleasereturnconditionandestimatesoftheexpectedfuturemaintenanceconditionoftheaircraftatthetimeofleaseexpiry.Theseestimatestakeintoaccountcurrentcostsofthesemaintenanceevents,estimatesofinflationsurroundingthesecostsaswellasassumptionssurroundingutilizationoftherelatedaircraft.Anydifferenceintheactualmaintenancecostincurredandtheamountoftheprovisionisrecordedinaircraftmaintenanceexpenseintheperiod.Theeffectofanychangesinestimates,includingchangesindiscountrates,inflationassumptions,costestimatesorleaseexpiries,isalsorecognizedinmaintenanceexpenseintheperiod.Assumingtheaggregatecostforreturnconditionsincreasesby5%,holdingallotherfactorsconstant,therewouldbeacumulativebalancesheetadjustmenttoincreasetheprovisionby$62millionatDecember31,2018andanincreasetoaircraftmaintenanceexpensein2019ofapproximately$6million.Expectedfuturecashflowstosettletheobligationarediscounted.Ifthediscountratesweretoincreaseby1%,holdingallotherfactorsconstant,therewouldbeacumulativebalancesheetadjustmenttodecreasetheprovisionby$21millionatDecember31,2018.Anequivalentbutoppositemovementinthediscountratewouldresultinasimilarimpactintheoppositedirection.

2018 ANNUAL REPORT


Income Taxes

Incometaxassetsandliabilitiesaremeasuredattheamountthatisexpectedtoberealizedorincurreduponultimatesettlementwithtaxationauthorities.Suchassessmentsarebasedupontheapplicableincometaxlegislation,regulationsandinterpretations,allofwhichmaybesubjecttochangeandinterpretation.Deferredincometaxassetsandliabilitiesarecomposedofthetaxeffectoftemporarydifferencesbetweenthecarryingamountandtaxbasisofassetsandliabilities,aswellastheincometaxeffectofundeductedincometaxlosses.Thetimingofthereversaloftemporarydifferencesisestimatedandtheincometaxratesubstantivelyenactedfortheperiodsofreversalisappliedtothetemporarydifference.Thecarryingamountsofassetsandliabilitiesaresubjecttotheaccountingestimatesthatareinherentinthosebalances.Assumptionsastothetimingofreversaloftemporarydifferencesincludeexpectationsaboutthefutureresultsofoperationsandfuturecashflows.Changesintaxlaws,taxratesorexpectedtimingofreversalmayhaveasignificantimpactontheamountsrecordedfordeferredincometaxassetsandliabilities.

IncometaxrecordedonAirCanada’sconsolidatedstatementofoperationsispresentedbelow.



2018 2017 2018 2017

Currentincometax $ 3 $ - $ (6) $ (16)Deferredincometax (18) (12) (232) 759Income tax (expense) recovery $ (15) $ (12) $ (238) $ 743

Inthethirdquarterof2017,AirCanadadeterminedthatitwasprobablethatsubstantiallyallofthedeferredincometaxassetswouldberealized.Accordingly,AirCanadarecordedataxrecoveryof$774million,whichwasrevisedto$755millionwith$19millionrelatedtoshare-basedcompensationreclassifiedtoRetainedearningsinthefourthquarterof2017.

Incometaxexpenseisrecognizedineachinterimperiodbasedonthebestestimateoftheweightedaverageannualincometaxrateexpectedforthefullyear.AirCanada’seffectivetaxratefor201826.78%(26.60%for2017).Theincometaxexpensediffersfromtheamountscomputedbyapplyingthestatutorytaxrate,principallyduetotheimpactofunrecognizedtaxbenefitsonforeignexchangecapitallossesandtheeffectofnon-deductibleexpenses.

2018 ANNUAL REPORT


14. ACCOUNTING POLICIES

IFRS 16 – Leases

IFRS16replacesIAS17Leasesandrelatedinterpretations.Thecoreprincipleisthatalesseerecognizesassetsandliabilitiesforallleaseswithaleasetermofmorethan12months.Alesseeisrequiredtorecognizearight-of-useassetrepresentingitsrighttousetheunderlyingleasedassetandaleaseliabilityrepresentingitsobligationtomakeleasepayments.Assetsandliabilitiesarisingfromaleaseareinitiallymeasuredonapresentvaluebasis.Themeasurementoftheleaseliabilityincludesnon-cancellableleasepayments(includinginflation-linkedpayments),andalsoincludespaymentstobemadeinoptionalperiodsifthelesseeisreasonablycertaintoexerciseanoptiontoextendthelease,ornottoexerciseanoptiontoterminatethelease.Purchaseoptionswhicharereasonablycertainofbeingexercisedarealsoincludedinthemeasurementoftheleaseliability.Leasepaymentswillnotincludevariableleasepaymentsotherthanthosethatdependonanindexorrate.Theright-of-useassetwillbederivedfromthecalculationoftheleaseliabilityandwillalsoincludeanyprovisionsthelesseewilloweforreturnconditionsonleasedassets.

Thenewstandardisintendedtoprovideanimprovedrepresentationofleasingtransactions,inparticularthosethatdonotcurrentlyrequirethelesseetorecognizeanassetandliabilityarisingfromanoperatinglease.IFRS16iseffectiveforannualperiodsbeginningonJanuary1,2019.EntitieshavetheoptionofadoptingafullretrospectiveapproachoramodifiedretrospectiveapproachontransitiontoIFRS16.

AirCanadawillapplythestandardeffectiveJanuary1,2019andwilltransitionwithafullretrospectiveapproachwithrestatementtoeachpriorreportingperiodpresented.AirCanadahaselectedthepackageofpracticalexpedientstonotreassesspriorconclusionsrelatedtocontractscontainingleasesandtoapplytherecognitionexemptionforshort-termleasesandcontractsforwhichtheunderlyingassethasalowvalue.

ThisstandardwillhaveasignificantimpactonAirCanada’sconsolidatedbalancesheet,alongwithachangetotherecognition,measurementandpresentationofleaseexpensesintheconsolidatedstatementofoperations.

AircraftLeases

AsofDecember31,2018,AirCanadahad126aircraftunderoperatingleases(111aircraftasatDecember31,2017),andAirCanadawillrecordsuchaircraftasright-of-useassetsandleaseliabilitiesofAirCanadainaccordancewiththerequirementsofthenewstandard.Additionally,theCorporationhasidentifiedthat,underIFRS16,AirCanadaisthelesseeinrespectofaircraftusedbyregionalcarriersprovidingservicesundertherespectivecapacitypurchaseagreements(“CPA”),andwillrecordsuchaircraftasright-of-useassetsandleaseliabilitiesofAirCanada.AsatDecember31,2018,therewere132aircraft(134aircraftasatDecember31,2017)operatingunderthesearrangementsonbehalfofAirCanada.

PropertyLeases

AirCanadahasleasesrelatedtoairportterminaloperationsspaceandotherrealestateleases.Forleasesrelatedtoterminaloperationsspace,therearegenerallyeffectivesubstitutionrightsinthehandsofthelessorandthereforethesearenotconsideredleasecontractsunderthestandard.Leaseswithreciprocalterminationrightswithanoticeperiodoflessthan12monthswouldbeconsideredshort-termleasesandthereforewouldbeexcludedfrombalancesheetrecognitionunderthepracticalexpedient.Finally,thoseairportterminalcontractswithvariableleasepaymentswillalsobeexcludedsincevariableleasepayments,otherthanthosebasedonanindexorrate,areexcludedfromthemeasurementoftheleaseliability.Thisresultsinaportfolioofpropertyleasesthatareexpectedtoberecordedasright-of-useassetsandleaseliabilitiesunderthestandardwhichrelatetodedicatedspaceinAirCanada’shublocationsofToronto,MontrealandVancouver,leasecontractsonbuildingspacededicatedtoAirCanadaforoffices,airportandmaintenanceoperations,MapleLeafLoungesandlandleases.

AccountingforLeasesandRight-of-UseAssets

Leasesarerecognizedasaright-of-useassetandcorrespondingliabilityatthedateofwhichtheleasedassetisavailableforusebytheCorporation.Eachleasepaymentisallocatedbetweentheliabilityandinterestexpense.Theinterestcostischargedtotheconsolidatedstatementofoperationsovertheleaseperiodtoproduceaconstantperiodicrateofinterestontheremainingbalanceoftheliabilityforeachperiod.

2018 ANNUAL REPORT


Right-of-useassetswillbeaccountedforunderIAS16Property,PlantandEquipment.Aircraftrecordedasright-of-useassetswillhavethesameaccountingpoliciesasdirectlyownedaircraft,meaningtheright-of-useassetswillbecomponentizedanddepreciatedovertheleaseterm.Consistentwithownedaircraft,anyqualifyingmaintenanceeventswillbecapitalizedanddepreciatedoverthelesseroftheleasetermandexpectedmaintenancelife.

Maintenanceprovisionsforend-of-leasereturnobligationswillberecorded,asapplicable,onaircraftleasesasamaintenanceexpenseoverthetermofthelease.Anychangestotheprovisionforend-of-leaseconditionswillberecognizedasanadjustmenttotheright-of-useassetandsubsequentlyamortizedtotheincomestatementovertheremainingtermofthelease.

TheapplicationofIFRS16requiresassumptionsandestimatesinordertodeterminethevalueoftheright-of-useassetsandtheleaseliabilitieswhichmainlyrelatetotheimplicitinterestrateforaircraftleasesandtheincrementalborrowingrateatcommencementdateofthecontractforpropertyleases.Judgementmustalsobeappliedastowhetherrenewaloptionsarereasonablycertainofbeingexercised.

IncomeStatementImpacts

Theimpactsontheincomestatementwillbeaneliminationofaircraftrentandbuildingrent,whichisrecordedinotheroperatingexpenses,forthosecontractswhicharerecognizedasleases,andinsteadwillbereplacedbyanamortizationoftheright-of-useassetandinterestcostsontheleaseliability.Maintenanceexpenseisexpectedtodecreaseunderthestandardasqualifyingmaintenanceeventsfortheformeroperatingleaseswillbecapitalizedaspartoftheright-of-useassetanddepreciatedovertheirexpectedmaintenancelife.Thiswillbepartiallyoffsetbyhighermaintenanceprovisionexpenserecordedonallaircraftright-of-useassetswhichcontainendofleasemaintenancereturnconditions.Regionalairlinesexpenseisexpectedtodecreasetotheextentaircraftrentisremovedandrecordedindepreciationandinterestexpenseoutsideoftheregionalairlinesexpense.

SincealltheaircraftleasecontractsaredenominatedinUSdollars,theremaybeadditionalvolatilityintheforeignexchangerecognizedintheincomestatementduetotherevaluationoftheleaseliabilitiesandmaintenanceprovisionstotherateofexchangeineffectatthedateofthebalancesheet.

AnticipatedImpactto2018Results

Selectadjustedfinancialstatementinformation,whichreflectstheanticipatedimpactofadoptionofIFRS16onJanuary1,2018,ispresentedbelow.Lineitemsthatarenotexpectedtobeaffectedbythechangeinaccountingpolicyhavenotbeenincluded.Asaresult,thesub-totalsandtotalsdisclosedcannotberecalculatedfromthenumbersprovided.Insummary,thefollowingadjustmentsareanticipatedtobemadetotheamountsrecognizedinAirCanada’sconsolidatedstatementoffinancialpositionforthedateofinitialapplicationonJanuary1,2018.


December31,2017as

PreviouslyReported

AirCanadaAircraft

RegionalAircraft

PropertyLeases Expected January 1, 2018

as Restated

Accountsreceivable $ 814 $ (3) $ - $ - $ 811Depositsandotherassets 465 (63) - - 402Propertyandequipment 9,252 1,649 766 160 11,827Deferredincometax 456 71 144 13 684Total assets $ 17,782 $ 1,654 $ 910 $ 173 $ 20,519Accountspayableandaccruedliabilities 1,961 (22) (12) - 1,927

Currentportionoflong-termdebtandleaseliabilities

671 357 146 12 1,186

Totalcurrentliabilities 5,101 335 134 12 5,582Long-termdebtandleaseliabilities 5,448 1,452 1,092 198 8,190Maintenanceprovisions 1,003 70 78 - 1,151Otherlong-termliabilities 167 (8) - - 159Total liabilities $ 14,360 $ 1,849 $ 1,304 $ 210 $ 17,723Retainedearnings 2,554 (195) (394) (37) 1,928Total shareholders’ equity $ 3,422 $ (195) $ (394) $ (37) $ 2,796Total liabilities and shareholders’ equity $ 17,782 $ 1,654 $ 910 $ 173 $ 20,519

2018 ANNUAL REPORT


TheexpectedimpactoftheadoptionofIFRS16onAirCanada’s2018consolidatedstatementofoperationsispresentedbelow.


December 31, 2018 as

Previously Reported

Air Canada Aircraft

Regional Aircraft

Property Leases

Expected December 31,

2018 as Restated

Operating revenuesPassenger $ 16,223 $ - $ - $ - $ 16,223Cargo 803 - - - 803Other 1,039 - - - 1,039Total revenues 18,065 - - - 18,065

Operating expensesAircraftfuel 3,969 - - - 3,969Regionalairlinesexpense 2,842 - (323) - 2,519Wages,salariesandbenefits 2,873 - - - 2,873Airportandnavigationfees 964 - - - 964Aircraftmaintenance 1,003 (100) - - 903Depreciation,amortizationandimpairment 1,080 424 197 16 1,717Salesanddistributioncosts 807 - - - 807Groundpackagecosts 602 - - - 602Aircraftrent 518 (512) - - 6Cateringandonboardservices 433 - - - 433

Communicationsandinformationtechnology

294 - - - 294

Other 1,506 - - (27) 1,479Total operating expenses 16,891 (188) (126) (11) 16,566Operating income 1,174 188 126 11 1,499

Non-operating income (expense)Foreignexchangeloss (317) (155) (105) (1) (578)Interestincome 108 - - - 108Interestexpense (331) (131) (91) (14) (567)Interestcapitalized 35 - - - 35


(50) - - - (50)

Lossonfinancialinstrumentsrecordedatfairvalue

(1) - - - (1)

Gainondebtsettlementsandmodifications 9 - - - 9Lossondisposalofassets (188) - - - (188)Other (34) (2) - - (36)Total non-operating expense (769) (288) (196) (15) (1,268)Income before income taxes 405 (100) (70) (4) 231Incometaxexpense (238) 27 19 1 (191)Net income $ 167 $ (73) $ (51) $ (3) $ 40EBITDAR $ 2,851 $ 100 $ 244 $ 27 $ 3,222

2018 ANNUAL REPORT


15. OFF-BALANCE SHEET ARRANGEMENTS

Guarantees

GuaranteesinFuelandDe-icingArrangements

AirCanadaparticipatesinfuelfacilityarrangementsoperatedthrougheightFuelFacilityCorporations,andthreeaircraftde-icingservicefacilities,alongwithotherairlinesthatcontractforfuelandde-icingservicesatvariousmajorairportsinCanada.Theseentitiesoperateonacostrecoverybasis.TheaggregatedebtoftheseentitiesthathasnotbeenconsolidatedbyAirCanadaunderIFRS10ConsolidatedFinancialStatementsisapproximately$571millionasatDecember31,2018(December31,2017-$529million),whichisAirCanada’smaximumexposuretolossbeforetakingintoconsiderationthevalueoftheassetsthatsecuretheobligationsandanycostsharingthatwouldoccuramongsttheothercontractingairlines.AirCanadaviewsthislosspotentialasremote.Eachcontractingairlineparticipatingintheseentitiessharesprorata,basedonsystemusage,intheguaranteeofthisdebt.Thematuritiesofthesedebtarrangementsvarybutgenerallyextendbeyondfiveyears.

IndemnificationAgreements

IntheordinarycourseofAirCanada’sbusiness,AirCanadaentersintoavarietyofagreements,suchasrealestateleasesoroperatingagreements,aircraftfinancingorleasingagreements,technicalserviceagreements,anddirector/officercontracts,andothercommercialagreements,someofwhichmayprovideforindemnificationstocounterpartiesthatmayrequireAirCanadatopayforcostsand/orlossesincurredbysuchcounterparties.AirCanadacannotreasonablyestimatethepotentialamount,ifany,itcouldberequiredtopayundersuchindemnifications.Suchamountwouldalsodependontheoutcomeoffutureeventsandconditions,whichcannotbepredicted.Whilecertainagreementsspecifyamaximumpotentialexposure,certainothersdonotspecifyamaximumamountoralimitedperiod.Historically,AirCanadahasnotmadeanysignificantpaymentsundertheseindemnifications.

AirCanadaexpectsthatitwouldbecoveredbyinsuranceformosttortliabilitiesandcertainrelatedcontractualindemnities.

16. RELATED PARTY TRANSACTIONS

AtDecember31,2018,AirCanadahadnotransactionswithrelatedpartiesasdefinedintheCPAHandbook,exceptthosepertainingtotransactionswithkeymanagementpersonnelintheordinarycourseoftheiremploymentordirectorshipagreements.

2018 ANNUAL REPORT


17. SENSITIVITY OF RESULTS

AirCanada’sfinancialresultsaresubjecttomanydifferentinternalandexternalfactorswhichcanhaveasignificantimpactonoperatingresults.Thefollowingtabledescribes,onanindicativebasis,thefinancialimpactthatchangesinfuelpricesandthevalueoftheCanadiandollarwouldgenerallyhavehadonAirCanada’spastoperatingresults.Anequivalentbutoppositemovementofthesensitivityfactorinthetablebelowwouldhavegenerallyresultedinasimilarbutoppositeimpact.Theseguidelineswerederivedfrom2018levelsofactivityandmakeuseofmanagementestimates.Theimpactsarenotadditive,donotreflecttheinterdependentrelationshipoftheelementsandmaynotbeindicativeoffuturetrendsorresultswhichmayvarysignificantlyduetoawiderangeoffactorsmanyofwhicharebeyondthecontrolofAirCanada.

Key Variable 2018 Measure

Sensitivity Factor Favourable/ (Unfavourable)

Estimated Operating

Income Impact(Canadiandollarsinmillions)

FuelFuel–Jetfuelprice(US$/barrel)(1) 93.0 US$1/barrelincrease $ (46)Fuel–Jetfuelprice(CADcents/litre)(1) 80.4 1%increase $ (43)Currency ExchangeC$toUS$ C$1=US$1.33 1centincrease

(i.e.$1.33to$1.32perUS$)

Operating income (2) $ 19Netinterestexpense $ 2

Revaluationoflong-termdebt,U.S.dollarcash,cashequivalentsandshort-terminvestmentsandotherlong-termmonetaryitems,net

$ 44

Remeasurementofoutstandingcurrencyderivatives

$ (37)

Pre-tax Income Impact $ 28

(1) Excludestheimpactoffuelsurchargesandfuelhedging.Refertosection12“FinancialInstrumentsandRiskManagement”ofthisMD&AforinformationonAirCanada’sfuelderivativeinstruments.

(2)Theoperatingincomeimpactofcurrencyexchangemovementsisbeforetheimpactofhedgingactivities,suchasthroughtheuseofforeigncurrencyderivativesandholdingU.S.dollarcashreserves.Thegainsandlossesrelatedtothesehedgingactivitiesarerecordedinnon-operatingincome(expense)onAirCanada’sconsolidatedstatementofoperations.

2018 ANNUAL REPORT


18. RISK FACTORS

TherisksdescribedbelowshouldbereadcarefullywhenevaluatingAirCanada’sbusinessandtheforward-lookingstatementscontainedinthisreportandotherstatementsAirCanadamaymakefromtimetotime.AnyoftheseriskscouldmateriallyandadverselyaffectAirCanada’sbusiness,operatingresults,financialconditionandtheoutcomeofmattersastowhichforward-lookingstatementsaremade.Inaddition,theserisksmaynotbetheonlyrisksfacedbyAirCanada.OtherrisksofwhichAirCanadaisnotawareorwhichAirCanadacurrentlydeemsnottobematerialmaysurfaceandhaveamaterialandadverseimpactonAirCanada,itsbusiness,resultsfromoperations,financialconditionandtheoutcomeofmattersastowhichforward-lookingstatementsaremade.

Risks Relating to Air Canada

Operating results –AirCanadamaysustainsignificantlossesandnotbeabletosuccessfullyachieveand/orsustainpositivenetprofitabilityorrealizetheobjectivesofanyorallofitsinitiatives

Avarietyoffactors,includingeconomicconditionsandotherfactorsdescribedinthis“RiskFactors”section,mayresultinAirCanadaincurringsignificantlosses.Despiteongoingstrategicandbusinessinitiatives,AirCanadamaynotbeabletosuccessfullyachieveand/orsustainpositivenetprofitabilityorrealizetheobjectivesofanyorallofitsinitiatives,includingthosewhichseektoincreaserevenues,decreasecosts,improvemargins,profitablydeployadditionalcapacity,generatesufficientreturnsonitscapitalexpendituresoroffsetormitigaterisksfacingAirCanada,includingthosedescribedinthis“RiskFactors”section.

Economic and geopolitical conditions –ChangesineconomicandgeopoliticalconditionscouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition

AirlineoperatingresultsaresensitivetoeconomicandgeopoliticalconditionswhichcanhaveasignificantimpactonAirCanada.Forexample,economicandgeopoliticalconditionsmayimpactdemandforairtransportationingeneralortoorfromcertaindestinations,andmayalsoimpactAirCanada’soperatingcosts,operatingrevenues,costsandavailabilityoffuel,foreignexchangecosts,pensionplan

contributions,andcostsandavailabilityofcapitalandsuppliesrequiredbyAirCanada.EspeciallyinlightofAirCanada’ssubstantialfixedcoststructure,anyprolongedorsignificantimpactarisingfromeconomicandgeopoliticalconditions,includingweaknessoftheCanadian,U.S.orworldeconomies,changestopoliticaloreconomicrelationshipswithinorbetweenjurisdictionswhereAirCanadaoperates,orthreatenedoractualoutbreaksofhostilitiesinoradjacenttoregionsAirCanadaservesoroverwhichitoperatesflights(ortoregionsitplanstooperate),couldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.

Airlinefaresandpassengerdemandhavefluctuatedsignificantlyinthepastandmayfluctuatesignificantlyinthefuture.AirCanadaisnotabletopredictwithcertaintymarketconditionsandthefaresthatAirCanadamaybeabletocharge.Customerexpectationscanchangerapidlyandthedemandforlowerfaresmaylimitrevenueopportunities.Travel,especiallyleisuretravel,isadiscretionaryconsumerexpense.Demandforbusinessandpremiumtravelisalsoimpactedbyeconomicconditions.DepressedeconomicconditionsinareasservedbyAirCanada,geopoliticalinstabilityinvariousareasoftheworldandconcernsabouttheenvironmentalimpactsofairtravelandtendenciestowardslessenvironmentallyimpactfultravelwherecustomersmayreduceoraltertheirtravelactivities,couldeachhavetheeffectofreducingdemandforairtravelinCanadaandabroadandcouldmateriallyadverselyimpactAirCanada,itsbusiness,resultsofoperationsandfinancialcondition.

Fuel costs –SignificantfluctuationsorincreasesinfuelpricescouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition

FuelcostsconstituteoneofAirCanada’slargestoperatingcostitems.Fuelpriceshaveandmaycontinuetofluctuatewidelydependingonmanyfactors,includinginternationalmarketconditions,geopoliticalevents,jetfuelrefiningcostsandtheCanada/U.S.dollarexchangerate.AirCanadacannotaccuratelypredictthefuturepriceoffuel.Duetothecompetitivenatureoftheairlineindustry,AirCanadamaynotbeabletopassonincreasesinfuelpricestoitscustomersbyincreasingitsfares.Inaddition,AirCanadamaybeunabletoappropriatelyorsufficiently,ormaynot,hedgetherisksassociatedwithfluctuationsinfuelprices.Furthermore,theimpactoflowerjetfuelpricescouldbeoffsetbyincreasedpricecompetition,andaresultingdecreaseinrevenues,forallaircarriers.Significantfluctuations(includingincreases)infuelpricescouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.

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Foreign exchange –AsignificantdeteriorationoftheCanadiandollarrelativetotheU.S.dollarcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition

AirCanada’sfinancialresultsaresensitivetothefluctuatingvalueoftheCanadiandollar.AirCanadaincurssignificantexpensesinU.S.dollarsforitemssuchasfuel,aircraftpurchases,aircraftleasingandmaintenance,airportcharges,groundpackagecosts,salesanddistributioncosts,interestanddebtservicingpayments,whileasubstantialportionofitsrevenuesaregeneratedinCanadiandollars.Duetothecompetitivenatureoftheairlineindustryandcustomersensitivitytotravelcosts,AirCanadamaynotbeabletopassonincreasesinforeignexchangecoststoitscustomersbyincreasingitsfares.Inaddition,AirCanadamaybeunabletoappropriatelyorsufficientlyhedgetherisksassociatedwithfluctuationsinexchangerates.AsignificantdeteriorationoftheCanadiandollarrelativetotheU.S.dollarorotherforeigncurrencieswouldincreasethecostsofAirCanadarelativetoitsU.S.orotherforeigncompetitors.AnyofthesefactorscouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.

Competition –AirCanadaoperatesinahighlycompetitiveenvironmentandfacesincreasingcompetitioninNorthAmericaandinternationally

AirCanadaoperateswithinahighlycompetitiveindustryandcontinuouslyencounterssubstantialpricecompetition.Carriers,includinglow-cost,ultra-low-cost,domestic,U.S.andforeigncarriers,haveentered,announcedtheirintentiontoenterorcontinuetoenterorexpandintomarketsAirCanadaoperatesinorplanstooperatein,includingdomestic,U.S.transborder,internationalandleisure-orientedmarkets.

CarriersagainstwhichAirCanadacompetes,includingU.S.carriers,mayalsoundergo(andsomehaveundergone)substantialreorganizations(includingbywayofmergerwithoracquisitionbyanothercarrier),creatingreducedlevelsofindebtedness,loweroperatingcostsandothercompetitiveadvantages,andmaythereforebeabletomoreeffectivelycompeteagainstAirCanada.Consolidationwithintheairlineindustryandcarriersincreasinglyenteringintointegratedcommercialcooperationarrangements,suchasjointventures,whichmaybeabletocompetemoreeffectively,couldresultinincreasedcompetition.

TheproximityofseveralAmericanairportsincitiesclosetotheCanadianborderhasalsopresentedanadditionalchallengeforAirCanada.Highertaxes,chargesandfeesforpassengersdepartingfrom

CanadahasredirectedappreciablepassengertrafficawayfromCanadianairportstoairportsintheUnitedStates.CarriersoperatingfromtheUnitedStateshaveandmaycontinuetoincreasetheircapacityattheseairportsandattractCanadian-originating,price-sensitivecustomers.

TheprevalenceofInternettravelwebsitesandothertravelproductdistributionchannelshasalsoresultedinasubstantialincreaseindiscountedandpromotionalfaresinitiatedbyAirCanada’scompetitors.Competitorsalsocontinuetopursuecommissions/incentiveactionsand,inmanycases,increasethesepayments.

AirCanada’sabilitytoreduceitsfaresinordertoeffectivelycompeteisdependentonAirCanada’sabilitytoachieveacceptableoperatingmarginsandmaybelimitedbyapplicablelawsorgovernmentpoliciestoencouragecompetition.

Increasedcompetition,fromexisting,emergingornewcompetitors,includingcompetitorsenteringintoneworexpandedjointventuresandotherarrangements,orutilizingdisruptivebusinessmodelsortechnologies,andothercompetitiveactions,orbenefitingfromforeignsubsidiesorotheradvantagesnotavailabletoAirCanada,couldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.

Dependence on technology –AirCanadareliesheavilyontechnologytooperateitsbusinessandanytechnologysystemsfailureordatabreachcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition

AirCanadareliesheavilyontechnologytooperateitsbusiness,increaseitsrevenuesandreduceitscosts.ThesesystemsincludethoserelatingtoAirCanada’scommunications,websites,reservations,airportcustomerservicesandflightoperations.AirCanadadependsontheperformanceofitsmanysuppliers,whoseperformanceisinturndependentupontheirrespectivetechnologies.

Aspartofregularbusinessoperations,AirCanadacollects,processesandstoressensitivedata,includingpersonalinformationofourpassengers,employeesandinformationofourbusinesspartners.Thesecureoperationofthenetworksandsystemsonwhichthistypeofinformationisstored,processedandmaintainediscriticaltoourbusiness.

Technologysystemsmaybevulnerabletoavarietyofsourcesoffailure,interruptionormisuse,includingbyreasonofhumanerror,thirdpartysuppliers’actsoromissions,naturaldisasters,terroristattacks,telecommunicationsfailures,powerfailures,

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unauthorizedorfraudulentusers(includingcyber-attacks,malware,ransomware,computervirusesandthelike),andotheroperationalandsecurityissues.

Itisgenerallyviewedthatcyber-attackshaveincreasedandwillcontinuetoincreaseinbothprevalenceandsophistication.AirCanadainvestsininitiatives,includingsecurityinitiativesanddisasterrecoveryplans;however,theseinitiativesmaynotbesuccessfuloradequatelyaddressahighlydynamicandcontinuallyevolvingthreatlandscape.Anytechnologysystemsfailure,interruptionormisuse,securitybreachorfailuretocomplywithapplicabledataconfidentiality,privacy,securityorotherrelatedobligations,whetheratAirCanadaorathirdpartyonwhomAirCanadarelies,couldadverselyaffectAirCanada’sreputationandexposeAirCanadatolitigation,claimsforcontractbreach,fines,sanctionsorotherwisemateriallyandadverselyaffectAirCanada’soperations,anyofwhichcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.

Strategic, business, technology and other important initiatives –Adelayorfailuretoidentifyanddevise,investinandimplementcertainimportantinitiativescouldhaveamaterialimpactonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition

Inordertooperateitsbusiness,achieveitsgoalsandremaincompetitive,AirCanadacontinuallyseekstoidentifyanddevise,investin,implementandpursuestrategic,business,technologyandotherimportantinitiatives,suchasthoserelatingtotheimplementationofAmadeusAltéaSuitetoreplaceitsexistingpassengerservicessystem,theintegrationoftheAeroplanloyaltybusinessfollowingitsacquisitioninearly2019,thelaunchofAirCanada’snewloyaltyprogram,itsaircraftfleetrenewalprogram(includingtheplannedre-fleetingofitsnarrow-bodyaircraftwithBoeing737MAXaircraftandAirbusA220(formerlyBombardierC-Series)aircraftanddisposalofaircraftthatarebeingreplaced),participationintheleisureorlowercostmarket(includingthroughAirCanadaRouge),jointventurearrangements,revenueenhancementinitiatives,businessprocesses,informationtechnology,revenuemanagement,costtransformation,improvingpremiumpassengerrevenues,expansionofflyingcapacity(includinginrespectofnewaircraftandroutes),corporateculturetransformationinitiativesseekingtoensureaconsistentlyhigh-qualitycustomerserviceexperienceandothers.Theseinitiatives,includingactivitiesrelatingtotheirdevelopmentandimplementation,maybeadverselyimpactedbyawiderangeoffactors,manyofwhicharebeyondAirCanada’scontrol.Suchfactorsincludetheneedto

seeklegalorregulatoryapprovals,theperformanceofthirdparties(includingsuppliers),theimplementationandintegrationofsuchinitiativesintoAirCanada’sotheractivitiesandprocessesaswellastheadoptionandacceptanceoftheseinitiativesbyAirCanada’scustomers,suppliersandpersonnel.Adelayorfailuretosufficientlyandsuccessfullyidentifyanddevise,investinorimplementanyoftheseinitiativescouldadverselyaffectAirCanada’sabilitytooperateitsbusiness,achieveitsgoalsandremaincompetitiveandcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.

Key supplies and suppliers –AirCanada’sfailureorinabilitytoobtaincertaingoodsandservicesfromkeysuppliersonfavourabletermscouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition

AirCanadaisdependentuponitsabilitytosource,onfavourabletermsandcosts,sufficientquantitiesofgoodsandservicesofdesirablequality,inatimelymanner,includingthoseavailableatairportsorfromairportauthorities,orotherwiserequiredforAirCanada’sbusinessoroperations,suchasfuel,aircraftandrelatedparts,airportservices,aircraftmaintenanceservices,andinformationtechnologysystemsandservices.Incertaincases,AirCanadamayonlybeabletoaccessgoodsandservicesfromalimitednumberofsuppliers(orfromsolesourcesuppliers)andthetransitiontoneworalternativesuppliers,whichmaybenecessitatedbyreasonofsuchsuppliersincreasingtheirratesorbytheirfailuretoperform,maynotbepossibleormaytakeasignificantamountoftimeorrequiresignificantresources.Afailure,refusalorinabilityofasuppliermayariseasaresultofawiderangeofcauses,manyofwhicharebeyondAirCanada’scontrol.AnyfailureorinabilityofAirCanadatosuccessfullysourcegoodsandservices,ortosourcegoodsandservicesofdesirablequalityontermsandpricingandwithinthetimeframesacceptabletoAirCanada,couldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.

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Aeroplan loyalty program –Lossofredemptionpartners,increasedredemptionratesofloyaltypoints,ordisruptionsorotherinterruptionsofservicesaffectingtheAeroplanloyaltyprogramcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition

InJanuary2019,AirCanadacompletedtheacquisitionofAimiaCanadaInc.,ownerandoperatoroftheAeroplanloyaltybusinessandprogram.ThroughAeroplan,AirCanadaoffersitscustomerswhoareAeroplanmemberstheopportunitytoearnAeroplanMiles,whichmanagementbelievesisasignificantfactorinmanycustomers’decisiontotravelwithAirCanadaandcontributestobuildingcustomerloyalty.ThesuccessoftheAeroplanprogramisdependentonmaintainingsufficientaccumulationandredemptionpartners.IncreasesinredemptionratesforoutstandingAeroplanpointsmayalsohaveamaterialadverseeffect.DifficultiesintegratingtheAeroplanbusinessintoAirCanada’sbusiness,anyfailurestoadequatelyoperatetheAeroplanprogramorinterruptionsordisruptionsofAeroplanprogramservices,couldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.

BuildingontheAeroplanprogram,AirCanadaisworkingtoimplementanewloyaltyprogramwhichinvolvessignificantinvestmentsaswellascertainrisksanduncertainties,includingrisksrelatingtoattractingnewandretainingcurrentmembers,implementingtherequiredinformationtechnologyandloyaltymanagementsystems,successfullyconcludingstrategiccommercialarrangements,andtransitioningfromtheAeroplanprogramtothenewloyaltyprogram.ThoughAirCanadabelievesitwouldbeabletomitigateandovercomerisksandsuccessfullycreateandlaunchitsnewloyaltyprogram,thetransitionfromtheAeroplanprogramandthelaunchandoperationofAirCanada’snewloyaltyprogramentailriskswhichcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.

Air Canada’s brand –ThefailuretopreserveorgrowthevalueofAirCanada’sbrandcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition

AirCanadabelievesthatitssuccessisdependentonthevalueofitsbrandandonAirCanada’sabilitytopreserve,growandleveragethatvalue.TheAirCanadabrandisrecognizedthroughouttheworld,andAirCanadahasreceivedhighratings

inexternalbrandvaluestudies,basedinpartonconsumerperceptionsonavarietyofsubjectivequalities.AirCanadabelievesithasandcontinuestobuildanexcellentreputationgloballyforthesafetyandqualityofitsservices,andforthedeliveryofaconsistentlypositivepassengerexperience.AirCanada’sreputationandbrandcouldalsobedamagedifexposedtosignificantadversepublicitythroughsocialmedia.Adversepublicity,whetherjustifiedornot,canrapidlyspreadthroughsocialordigitalmedia.Totheextentweareunabletorespondtimelyandappropriatelytoadversepublicity,ourbrandandreputationmaybedamaged.AnyfailuretopreserveorgrowAirCanada’sbrand,includingbyreasonoftheconductofAirCanadaoranyofitsbusinesspartnersorotherexternalparties,couldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.

Airport user fees and air navigation fees –IncreasesinairportuserfeesandairnavigationfeescouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationandfinancialcondition

Airportandairnavigationauthoritieshaveorcouldsignificantlyincreasetheirfees.Thoughcertainauthoritieshaveimplementedsomefeereductions,ifauthoritiesinCanadaorelsewhereweretosignificantlyincreasetheirfees,AirCanada,itsbusiness,resultsfromoperationsandfinancialconditioncouldbemateriallyadverselyaffected.

Leverage –AirCanadahasasignificantamountofindebtedness,andtherecanbenoassurancethatitwillbeabletosatisfyitsdebt,leaseandotherobligations

AirCanadahasasignificantamountofindebtedness,includingsubstantialfixedobligationsunderaircraftleases,aircraftpurchasesandotherfinancings,andasaresultofanychallengingeconomicorotherconditionsaffectingAirCanada,AirCanadamayincurgreaterlevelsofindebtednessthancurrentlyexistorareplanned.AlthoughAirCanadahasbeenfocusingonreducingitslevelofindebtednessandimprovingitsleverageratios,theamountofindebtednessthatAirCanadahasandwhichitmayincurinthefuturecouldhaveamaterialadverseeffectonAirCanada,forexample,by(i)limitingAirCanada’sabilitytoobtainadditionalfinancing,(ii)requiringAirCanadatodedicateasubstantialportionofitscashbalancesorcashflowfromoperationstopaymentsonitsindebtednessandfixedcostobligations,therebyreducingthefundsavailableforotherpurposes,(iii)makingAirCanadamorevulnerabletoeconomicdownturnsand(iv)limitingAirCanada’sflexibility

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inplanningfor,orreactingtochangesinitsbusinessenvironment,includingcompetitivepressures.

TheabilityofAirCanadatomakescheduledpaymentsunderitsindebtednesswilldependon,amongotherthings,itsfutureoperatingperformanceanditsabilitytorefinanceitsindebtedness,ifnecessary.Inaddition,asAirCanadaincursindebtednesswhichbearsinterestatfloatinginterestrates,totheextenttheseinterestratesincrease,itsinterestexpensewillincrease.Moreover,AirCanadaincursasignificantproportionofitsindebtednessinforeigncurrencies,primarilyinU.S.dollars,andasaresult,futuredebtservicingrepaymentsaresubjecttoforeignexchangeriskandtheCanadianequivalentamountofindebtednessmayincrease.TherecanbenoassurancethatAirCanadawillatalltimesbeabletogeneratesufficientcashfromitsoperationstosatisfyitsdebts,leaseandotherobligations.Eachofthesefactorsis,toalargeextent,subjecttoeconomic,financial,competitive,regulatory,operationalandotherfactors,manyofwhicharebeyondAirCanada’scontrol.

High fixed costs and low margins –Theairlineindustrymaysufferfromlowprofitmarginsandhighfixedcosts

Theairlineindustryhashistoricallybeencharacterizedbylowprofitmarginsandhighfixedcosts.Thecostsofoperatingaflightdonotvarysignificantlywiththenumberofpassengerscarriedand,therefore,arelativelysmallchangeinthenumberofpassengers,farepricingortrafficmixcouldhaveasignificantimpactonAirCanada’soperatingandfinancialresults.Thisconditionmaybeexacerbatedbyaggressivepricingbycompetitors,whichcouldhavetheeffectofdrivingdownfaresincertainmarkets.AlthoughAirCanada’smarginshaveimprovedinrecentyears,ashortfallfromexpectedrevenuelevelsorprofitmarginscouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.AirCanadahasfocusedonimprovingresiliencytoweatherdownturnsinitsbusiness;however,sucheffortsmaynotbesuccessful.Asaresultofhighfixedcosts,shouldAirCanadaberequiredtoreduceitsoverallcapacityorthenumberofflightsoperated,itmaynotbeabletosuccessfullyreducecertainfixedcostswithinatimeframerequiredtosufficientlymitigatetheeffectsofanydownturns,andAirCanadamayalsoberequiredtoincursignificantterminationorotherrestructuringcosts,anyofwhichcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.

Regional carriers –ThefailurebyregionalcarrierstofulfilltheirobligationstoAirCanadacouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition

AirCanadaseekstoenhanceitsnetworkthroughcapacitypurchaseagreementswithregionalairlinessuchasJazz,SkyRegionalandotherairlinesoperatingflightsonbehalfofAirCanada.PursuanttothetermsoftheJazzCPA,AirCanadapaysJazzanumberoffees,someofwhicharefixedandotherswhicharedeterminedbaseduponcertaincostsincurredbyJazz.AirCanadaalsoreimbursesJazzforcertainpass-throughcostsincurredbyJazz(orarrangestoprovidetherelatedsuppliestoJazz),suchasfuel,navigation,landingandterminalfees.Inaddition,theJazzCPArequiresthatJazzmaintainaminimumfleetsizeandcontainsaminimumaveragedailyutilizationguaranteewhichrequiresAirCanadatoutilizeJazzforthatamountofflying.SignificantincreasesinJazz’scosts,thefailurebyJazztoadequatelyfulfillitsobligationsundertheJazzCPA,factorswhichmayreducetheutilizationoftheJazzfleet,includingeconomicormarketdownturns,andunexpectedinterruptionsorcessationofJazz’sservicescouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.

ThefailurebyAirCanada’sotherregionalcarrierstofulfilltheirobligationsundertheirrespectiveagreements,orunexpectedinterruptionsordisruptionsoftheirservices,aswellasminimumguaranteesincapacitypurchaseagreementswhichmaylimitAirCanada’sabilitytoeffectivelymanageregionalcapacityinresponsetoeconomicdownturns,marketpressuresorotherexternalevents,couldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.

Labour costs and labour relations –AirCanadamaynotbeabletomaintainlabourcostsatappropriatelevelsorsecurelabouragreementswhichpermitittosuccessfullypursueitsstrategicinitiatives.Therecanbenoassurancethatcollectivebargainingagreementswillbefurtherrenewedwithoutlabourconflictsand/ordisruptions

LabourcostsconstituteoneofAirCanada’slargestoperatingcostitems.TherecanbenoassurancethatAirCanadawillbeabletomaintainsuchcostsatlevelsthatdonotnegativelyaffectitsbusiness,resultsfromoperationsandfinancialcondition.MostofAirCanada’semployeesareunionized.WhileAirCanadahasestablishedlongtermarrangementswithunionsrepresentingasignificantportionofits

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unionizedemployees,therecanbenoassurancethatfutureagreementswithemployees’unionsortheoutcomeofarbitrationswillbeontermsconsistentwithAirCanada’sexpectationsorcomparabletoagreementsenteredintobyAirCanada’scompetitors.Anyfutureagreementsoroutcomesofnegotiationsorarbitrations,includinginrelationtowagesorotherlabourcostsorworkrules,mayresultinincreasedlabourcostsorothercharges,ortermsandconditionsrestrictingorreducing,AirCanada’sabilitytosustainitsbusinessobjectivesorpursueitsstrategicinitiatives,whichcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.

Therecanbenoassurancethatcollectiveagreementswillbefurtherrenewedwithoutlabourconflictoractionorthattherewillnototherwisebeanylabourconflictoractionthatcouldalsoleadtoadegradation,interruptionorstoppageinAirCanada’sserviceorotherwiseadverselyaffecttheabilityofAirCanadatoexecuteonitsbusinessplansoroperateitsbusiness,eitherofwhichcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.InrespectoftheunionsforCanadian-basedemployees,strikesorlock-outsmaylawfullyoccurfollowingthetermandnegotiationsoftherenewalofcollectiveagreementsonceanumberofpre-conditionsprescribedbytheCanada Labour Codehavebeensatisfied.

AnylabourdisruptionorworkstoppagebyanyoftheunionizedworkgroupsofJazz,orotherairlinesoperatingflightsonbehalfofAirCanada,orotherkeysuppliers,orofotherpartieswithwhomAirCanadaconductsbusinessorreliesoncouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.Inaddition,labourconflictsatStarAlliance®partnersorinvolvingtheoperationsofkeyairportscouldresultinlowerdemandforconnectingtrafficwithAirCanada,whichcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.

Star Alliance and Joint Ventures –DepartureofakeymemberfromStarAllianceorthefailurebyakeymembertomeetitsobligations,includingunderjointventuresarrangements,couldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition

ThestrategicandcommercialarrangementswithStarAlliancemembers,includingAirCanada’sA++jointventurecounterparties,LufthansaAGandUnitedAirlines,provideAirCanadawithimportantbenefits,includingcodesharing,efficientconnectionsand

transfers,reciprocalparticipationinfrequentflyerprogramsanduseofairportloungesfromtheothermembers.ShouldakeymemberleaveStarAllianceorotherwisefailtomeetitsobligationstowardsAirCanada,AirCanada,itsbusiness,resultsfromoperationsandfinancialconditioncouldbemateriallyadverselyaffected.

Interruptions or disruptions in service –InterruptionsordisruptionsinservicecouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition

AirCanada’sbusinessissignificantlydependentuponitsabilitytooperatewithoutinterruptiontoorfromanumberofhubairports,includingTorontoPearson.Delaysordisruptionsinservice,includingthoseduetosecurity,computermalfunctionsorotherincidents,weatherconditions,labourconflictswithairportworkers,baggagehandlers,airtrafficcontrollers,securitypersonnel,andotherworkersnotemployedbyAirCanadaorothercausesbeyondthecontrolofAirCanadacouldhaveamaterialadverseimpactonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.

Interruptionsanddisruptionsinservicemaybecausedby,andthedemandandcostofairtravelmaybeadverselyimpactedby,environmentalconditions,technologyissuesandfactorsinadditiontothoserelatingtotheweather.Environmentalconditionsandfactors,suchasthosearisingfromvolcaniceruptionsorothernaturalphenomena,aswellasthosearisingfromman-madesources,couldcauseinterruptionsanddisruptionsinservice,increaseAirCanada’scostsoradverselyimpactdemandforairtravel,anyofwhichcouldhaveamaterialadverseimpactonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.

Need for capital and liquidity –AirCanadamaynotbeabletoobtainsufficientfundsinatimelywayandonacceptabletermstoprovideadequateliquidityandtofinancenecessaryoperatingandcapitalexpenditures

AirCanada’sliquiditylevelsmaybeadverselyimpactedbyrisksidentifiedinthisMD&A,includingeconomicconditions,foreignexchangerates,increasedcompetitionfromdomestic,international,andU.S.transbordercarriers,includinglowercostcarriers,volatilefuelprices,labourissues,andcontractualcovenants(whichrequireAirCanadatomaintainminimumcashreservesandwhichcouldrequireAirCanadatodepositcashcollateralwiththirdparties).AspartofAirCanada’seffortstomanage

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suchchallengesandtosupportAirCanada’sbusinessstrategy,significantliquidityandsignificanton-goingoperatingandcapitalexpendituresarerequired.

AlthoughAirCanada’sliquiditylevelshavesignificantlyimprovedoverthelastseveralyears,therecanbenoassurancethatAirCanadawillcontinuetomaintainsufficientliquidity,whetherfromoperationsorbyobtainingfundsontermsacceptabletoAirCanada,tofinancetheoperatingandcapitalexpendituresnecessarytomanageanychallengesandsupportitsbusinessstrategy.

AmajordeclineinthemarketpriceofAirCanada’ssecuritiesmaynegativelyimpactAirCanada’sabilitytoraisecapital,issuedebt,retainemployees,makestrategicacquisitionsorenterintobusinessarrangements.DifferencesbetweenAirCanada’sactualoranticipatedfinancialresultsandthepublishedexpectationsoffinancialanalysts,aswellaseventsaffectingourbusinessoroperatingenvironment,maycontributetovolatilityinAirCanada’ssecurities.Amajordeclineinthecapitalmarketsingeneral,oranadjustmentinthemarketpriceortradingvolumesofAirCanada’ssecurities,maynegativelyaffectourabilitytoraisecapital,issuedebt,retainseniorexecutivesandotherkeyemployees,makestrategicacquisitionsorenterintobusinessarrangements.

Failuretomaintainorgeneraterequiredfunds,whetherfromoperationsorfinancings,couldrequireAirCanadatodelayorabandonsomeorallofitsanticipatedexpendituresortomodifyitsbusinessstrategyandthiscouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.Furthermore,competitorswithgreaterliquidityortheabilitytoraisemoneymoreeasilyoronlessoneroustermscouldrepresentacompetitivedisadvantagetoAirCanada.

AirCanada’screditratingsinfluenceitsabilitytoaccesscapitalmarketsandmaintainrequiredliquiditylevels.TherecanbenoassuranceastoAirCanada’screditratings,anddowngradesorimprovementstocreditratingsthatdonotmaterializeandthatmayotherwisebeanticipatedbythemarket,mayadverselyimpactAirCanada’sborrowingcosts,itsabilitytoattractcapital,itsliquidityanditsabilitytooperateitsbusiness,allofwhichcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.

Pension plans –FailureorinabilitybyAirCanadatomakerequiredcashcontributionstoitspensionplanscouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition

AirCanadamaintainsseveraldefinedbenefitpensionplans,includingdomesticregisteredpensionplans,supplementalpensionplansandinternationalpensionplans.Canadianfederalpensionlegislationrequiresthatthefundedstatusofregisteredpensionplansbedeterminedperiodically,onbothagoingconcernbasis(essentiallyassumingindefiniteplancontinuation)andasolvencybasis(essentiallyassumingimmediateplantermination).

AirCanada’spensionfundingobligations(includingprojectedfundingobligations)mayvarysignificantlybasedonawidevarietyoffactors,includingpensionplansolvencyvaluations,regulatorydevelopments,plandemographics,changestoplanprovisions,assumptionsandmethodsusedandchangesineconomicconditions(mainlythereturnonfundassetsandchangesininterestrates)andotherfactors,aswellastheapplicationofnormalpastservicecontributionruleswhichwouldgenerallyrequireonefifthofanysolvencydeficitinadomesticregisteredplan,determinedonthebasisofanaverageoverthepreviousthreeyears,tobefundedeachyear.Actualcontributionsthataredeterminedonthebasisoffuturevaluationreportsfiledannuallymayvarysignificantlyfromprojections.Inaddition,currentservicecontributionsinrespectofadomesticregisteredplanarerequiredunlesstheyarefunded(ifpermittedsubjecttoapplicableplanrulesandlegislation)throughasufficientsurplusinsuchplan.DeterioratingeconomicconditionsoraprolongedperiodoflowordecreasinginterestratesmayresultinsignificantincreasesinAirCanada’sfundingobligations,whichcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.UnderfundedpensionplansorafailureorinabilitybyAirCanadatomakerequiredcashcontributionstoitspensionplanscouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.Seesection9.7“PensionFundingObligations”ofthisMD&Aforadditionalinformation.

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Limitations due to restrictive covenants –CovenantscontainedinagreementstowhichAirCanadaisapartymayaffectand,insomecases,significantlylimitorprohibitthemannerinwhichAirCanadaoperatesitsbusiness

SomeofthefinancingandothermajoragreementstowhichAirCanadaisapartycontain,andinthefuturemaycontain,restrictive,financial(includinginrelationtoassetvaluations,liquidity,fixedchargecoverageratio)andothercovenantswhichaffectand,insomecases,significantlylimitorprohibit,amongotherthings,themannerinwhichAirCanadamaystructureoroperateitsbusiness,includingbyreducingAirCanada’sliquidity,limitingAirCanada’sabilitytoincurindebtedness,createliens,sellassets,paydividends,makecapitalexpenditures,andengageinacquisitions,mergersorrestructuringsorachangeofcontrol.AlthoughAirCanadahas,inthelastfewyears,beenabletonegotiatemorefavourableandlessrestrictivecovenants,therecanbenoassurancethatitwillbeabletocontinuetodoso.FuturefinancingandothersignificantagreementsmaybesubjecttosimilarorstrictercovenantswhichlimitAirCanada’soperatingandfinancialflexibility,whichcouldmateriallyandadverselyaffectAirCanada’sabilitytooperateitsbusinessanditsprofitability.

AfailurebyAirCanadatocomplywithitscontractualobligations(includingrestrictive,financialandothercovenants),ortopayitsindebtednessandfixedcosts,couldresultinavarietyofmaterialadverseconsequences,includingtheaccelerationofitsindebtedness,thewithholdingofcreditcardproceedsbythecreditcardserviceprovidersandtheexerciseofremediesbyitscreditors,lessorsorotherco-contractingparties,andsuchdefaultscouldtriggeradditionaldefaultsunderotherindebtednessoragreements.Insuchasituation,AirCanadamaynotbeabletorepaytheacceleratedindebtednessorfulfillitsobligationsundercertaincontracts,makerequiredaircraftleasepaymentsorotherwisecoveritsfixedcosts.Also,thelendersunderthefinancingarrangementscouldforecloseuponallorsubstantiallyalloftheassetsofAirCanadawhichsecureAirCanada’sobligations.

Refertosection9.8“ContractualObligations”ofthisMD&A forinformationonAirCanada’screditcardprocessingagreements.

Current legal proceedings –AirCanadaisinvolvedinormaybesubjecttolegalproceedingswhichcouldmateriallyadverselyimpactAirCanada

Investigations by Competition Authorities Relating to Air Canada Cargo TheEuropeanCommission,theUnitedStatesDepartmentofJusticeandtheCompetitionBureauinCanada,amongothers,investigatedallegedanti-competitivecargopricingactivities,includingthelevyingofcertainfuelsurcharges,ofanumberofairlinesandcargooperators.TheinvestigationsconductedbytheU.S.DepartmentofJusticeandbytheCompetitionBureauinCanadaconcludedwithnoproceedingsagainstAirCanada.

Afterhavingrenderedadecisionagainstanumberofairlines,includingAirCanadain2010,whichwasoverturnedbytheEuropeanGeneralCourtinDecember2015,inMarch2017,theEuropeanCommissionrenderedanotherdecisionfindingthat12aircargocarriers,includingAirCanada,hadinfringedEuropeanUnioncompetitionlawinthesettingofcertaincargochargesandratesforvariousperiodsbetween1999and2006,imposingafineof21millionEuros(approximately$29million)onAirCanada.AirCanadapaidthefineasrequiredinthesecondquarterof2017,pendingtheoutcomeofanappealtotheEuropeanGeneralCourt.WhileAirCanadacannotpredictwithcertaintytheoutcomeofitsappealoranyrelatedproceedings,AirCanadabelievesithasreasonablegroundstochallengetheEuropeanCommission’sruling.

AirCanadaisalsonamedasadefendantorisotherwiseinvolvedinanumberofclassactionlawsuitsandotherproceedingsinCanada,EuropeandtheUnitedStatesinconnectionwiththeseallegations.TheclassactionproceedingintheUnitedStatesweresettledbyAirCanadain2012,andcertainthird-partyproceedingsintheUnitedKingdomrelatingtothesameallegationsweresettledin2018.

AsatDecember31,2018,AirCanadahasaprovisionof$17million($17millionasatDecember31,2017)relatingtooutstandingclaimsinthesematters,whichisrecordedinAccountspayableandaccruedliabilities.ThisprovisionisanestimatebaseduponthestatusofinvestigationsandproceedingsatthistimeandAirCanada’sassessmentastothepotentialoutcomeforcertainofthem.Theprovisiondoesnotaddresstheproceedingsandinvestigationsinalljurisdictions,butonlywherethereissufficientinformationtodoso.AirCanadahasdetermineditisnotpossibleatthistimetopredictwithanydegreeofcertaintytheoutcomeofallremainingproceedingsandinvestigations.Basedontheoutcomeofanydevelopmentsregardingproceedingsandinvestigations,AirCanadamayadjusttheprovisioninitsresultsforsubsequentperiodsasrequired.

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Mandatory RetirementAirCanadahasbeenengagedinanumberofproceedingsinvolvingchallengestothemandatoryretirementprovisionsofcertainofitscollectiveagreements.TheremainingcasesrelatetoretirementwhichoccurredpursuanttothepreviousAirCanada-AirCanadaPilotsAssociationcollectiveagreement,whichoriginallyincorporatedprovisionsofthepensionplantermsandconditionsapplicabletopilotsrequiringthemtoretireatage60.Thoseprovisionswerelateramendedandsince2012avarietyofretirementruleshavebeeninforce.Someofthosenewrules,notablyaboutbenefitcoverageforpilotsentitledtoanunreducedpensionandAirCanada’sdutytoaccommodatepilotsoverage65whowishtocontinueworking,arebeingchallenged.AirCanadahasfullyorpartiallyprevailedindefendingsomeofthesecomplaintsandisdefendingtheremainingones.Atthistime,itisnotpossibletodeterminewithanydegreeofcertaintytheextentofanyfinancialliabilitythatmayarisefromAirCanadabeingunsuccessfulinitsdefenceoftheseproceedings,thoughanysuchfinancialliability,ifimposed,wouldnotbeexpectedtobematerial.

Future legal proceedings

Inthecourseofconductingtheirbusiness,airlinesaresubjecttovariousclaimsandlitigation(includingclassactionclaims),includingwithrespecttoitscontractualarrangementsandcurrentornewlawsandregulations.AnyfutureclaimsorlitigationcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.

Key personnel –AirCanadaisdependentonkeyemployeesandcouldbemateriallyadverselyaffectedbyashortfallorsubstantialturnover

AirCanadaisdependentontheindustryexperience,qualificationsandknowledgeofavarietyofemployees,includingitsexecutiveofficers,managers,airlineflightandoperationspersonnelandotherkeyemployeestoexecuteitsbusinessplanandoperateitsbusiness.IfAirCanadaweretoexperienceashortfallorasubstantialturnoverinitsleadershiporotherkeyemployees,AirCanada,itsbusiness,resultsfromoperationsandfinancialconditioncouldbemateriallyadverselyaffected.Additionally,AirCanadamaybeunabletoattractandretainadditionalqualifiedkeypersonnelasneededinthefuture.

Risks Relating to the Airline Industry

Terrorist attacks and security measures –TerroristattacksandrelatedconsequencescouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition

Thepotentialforterroristattacksandterroristactivitycausesconcernanduncertaintyinthemindsofthetravelingpublic.Theoccurrenceofaterroristattack,anattemptedattackortheperceivedthreatofone(whetherornotinvolvingAirCanadaoranothercarrier,orinvolvingAirCanada’sdestinations,orotherdestinationsorregions),andrestrictivesecuritymeasures,suchasthoserelatingtothecontentofcarry-onbaggage,passengeridentificationdocumentrequirements,andpassengerscreeningprocedures,couldhaveamaterialadverseeffectonpassengerdemandforairtravelandonthenumberofpassengerstravelingonAirCanada’sflights.Itcouldalsoleadtoasubstantialincreaseininsurance,securityandothercosts,includinghigheroperatingcoststoavoidflyingoverairspacenearconflictzones.Anyresultingreductioninpassengerrevenuesand/orincreasesincosts,includinginsurance,securityorothercostscouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.

Casualty losses –AirCanada’sbusinessmakesitsubjecttolargeliabilityclaimsforseriouspersonalinjuryordeatharisingoutofaccidentsordisasters

Duetothenatureofitscorebusiness,AirCanadamaybesubjecttoliabilityclaimsarisingoutofaccidentsordisastersinvolvingaircraftonwhichAirCanada’scustomersaretravelingorinvolvingaircraftofothercarriersmaintainedorotherwiseservicedbyAirCanadaorthroughthirdpartiesprovidingservicestoAirCanada,includingclaimsforseriouspersonalinjuryordeath.AnysuchaccidentordisastermaysignificantlyharmAirCanada’sreputationforsafety,whichwouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.TherecanbenoassurancethatAirCanada’sinsurancecoveragewillbesufficienttocoveroneormorelargeclaimsandanyshortfallmaybematerial.

Accidentsanddisastersmayoccurdespiteallappropriatemeasuresbeingtaken,andasaresultofavarietyoffactorsbeyondAirCanada’scontrolincludingactsofterrorismandsabotage,severeweather,lightningstrikesandothernaturalphenomenon,birdstrikesaswellastheincreasingprevalenceofunmannedaerialvehicles.

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Regulatory matters –AirCanadaissubjecttoextensiveandevolvingdomesticandforeignregulationinawiderangeofmatters

Theairlineindustryissubjecttoextensivelegal,regulatoryandadministrativecontrolsandoversight,includinginrelationtotaxes,airportfeesandoperations,routerights,security,passengerandconsumerrights,flightcrewandotherlabourrules,advertising,privacy,datasecurity,licensing,competition,pensions,environment(includingnoiselevelsandcarbonemissions),foreignexchangecontrolsand,insomemeasure,pricing.

CompliancewithcurrentorfutureCanadianandinternationallaws,regulationsandadministrativerequirements,includingpotentiallyinconsistentorconflictinglawsorregulations,orlawsorregulationswhichdisproportionallyapplytoCanadianairlinesorAirCanadaspecifically(suchastheAir Canada Public Participation Act),mayimposesignificantcosts,impedimentsand/orcompetitivedisadvantages,andtherecannotbeanyassurancethatcurrentorfuturelaws,regulationsandadministrativerequirementswillnotadverselyaffectAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.

TheabilityofAirCanadatooperateflightsorotherwiseofferairservicesoninternationalroutesbetweenairportsinCanadaandothercountriesmaybesubjecttochange.ApplicablearrangementsbetweenCanadaandforeigngovernments,whichgovernmanyareasincludingtrafficrights,maybeamendedfromtimetotime,rulesandpolicieswithrespecttoairportoperationsmayberevised,andtheavailabilityofappropriateslotsorfacilitiesmaychange.AirCanadacurrentlyoperatesanumberofflightsoninternationalroutesundergovernmentarrangements,regulationsorpoliciesthatdesignatethenumberofcarrierspermittedtooperateonsuchroutes,thecapacityofthecarriersprovidingservicesonsuchroutes,theairportsatwhichcarriersmayoperateinternationalflights,orthenumberofcarriersallowedaccesstoparticularairports.Anyfurtherlimitations,additionsormodificationstosucharrangements,regulationsorpoliciescouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.Additionally,ifCanadaweretoadoptamoreliberalizedapproachinrelationtoairservicesarrangementswithforeigncountries,suchanapproachcouldhaveamaterialadverseimpactonAirCanada,itsbusiness,resultsfromoperationsandfinancialconditionandcouldresultintheimpairmentofmaterialamountsofrelatedtangibleandintangibleassets.

AirCanada’scurrentandfutureplanstoenterintoorexpandrevenue-sharingjointventuresandotheralliancearrangementsonvariousinternationalroutesareandmaybesubjecttoreceiptofapprovalsfromapplicableCanadianandinternationalauthorities,

totheirnotchallengingthem,andtosatisfyingthenecessaryapplicableregulatoryrequirements.Therecanbenoassurancethatsuchconditionswillbemetorwillcontinueineffectorthatexisting,orchangesin,regulatoryrequirementsorstandardscanbesatisfied.

ManyaspectsofAirCanada’soperationsmayalsobesubjecttotheproliferationofincreasinglystringentlawsandregulationsrelatingtoenvironmentalreforms,suchasintheareaofclimatechange,andincludingthefollowing:

TheInternationalCivilAviationOrganization(“ICAO”)globalmarket-basedmeasure(“GMBM”),adoptedin2016,includesemissionsfrominternationalflights.TheGMBMissettobeimplementedinphases,withthefirsttwophases(occurringfrom2021to2023,and2024to2026,respectively)tobevoluntaryandwiththethirdphase(from2027to2035)tobemandatory.Canadavoluntarilyadoptedthefirstphase.OnthebasisoftheGMBM,theEuropeanParliamentandCouncilhascontinuedexemptingflightsbetweenEuropeandthirdcountriesfromtheEuropeanUnion(“EU”)emissionstradingsystem(“ETS”).

In2016,theCanadianFederalGovernmentproposedapan-CanadianbenchmarkforcarbonpricingtobeimplementedinallCanadianjurisdictionsby2018,withpricingtobebasedongreenhousegasemissionsfromallfossilfuelssourcesincludingjetfuelandotherfuelsusedbyAirCanadaingroundoperationsandstationarycombustionequipment.Canadianprovincesmayeitherapplyanexplicitprice-basedsystem,suchasacarbontaxorlevy,oracapandtradesystem.Certainprovinces,suchasAlberta,BritishColumbiaandQuébechaveimplementedacarbonpricingsystem;othershavehadthefederalcarbonpricingbackstopsystemapplied.Since2017,AirCanadaandregionalcarriersoperatingflightsonbehalfofAirCanadahavebeensubjecttoacarbontaxforflightsoperatinginBritishColumbiaandinAlberta.

AirCanadacannotpredictwhether,orthemannerinwhich,theseorotherinitiativeswillultimatelybeimplementedortheirimpactonAirCanada;however,futuredevelopmentsinCanadaandabroadcouldadverselyimpactAirCanada,includingbyincreasingitscosts.WhileAirCanadaiscontinuallyfocusedonefficiencyimprovements,includingcarbonfootprintreductioninitiatives,theimpacttoAirCanadaofclimatechangeandotherenvironmentalinitiativesmay,inpart,dependupontheextenttowhichtheincreasedcostsrelatingsuchinitiatives,ifany,couldberecovered,includingintheformofhigherpassengerfaresandcargorates.

AirCanadaisalsosubjecttodomesticandforeignlawsregardingprivacyandsecurityofpassenger,employeeandotherdata,includingadvancepassengerinformationandaccesstoairlinereservationsystems,whicharenotconsistent

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inallcountrieswhichmayassertjurisdictionoverAirCanada,includingincountrieswhereAirCanadaoperatesorconductsbusiness.Theselawsandregulationsareproliferating,arebecomingincreasinglystringentandmayconflictwithoneanother.Theneedtocomplywiththeselawsandregulatoryregimesresultsinadditionaloperatingcostsandcomplexities,andfurtherregulationinthisareaornon-compliance,includinginrelationtodataprivacyandsecurityrequirements,couldhaveamaterialadverseeffectonAirCanada,itsbusiness(includingbyimpactingAirCanada’sgoodwillandreputation),resultsfromoperationsandfinancialcondition.

Certainjurisdictions(includingCanada,theUnitedStates,EuropeanUnioncountriesandotherjurisdictionswhereAirCanadaoperatesorconductsbusiness)haveenactedandimplemented,andtheyanddomesticregulatorsmayinthefutureenactandimplement,consumerprotectionandpassengerrightsmeasureswhicharebeingincreasinglyadopted.Suchmeasuresmayimposesignificant,unique,inconsistentorevenconflictingobligationsonAirCanada,whichmayresultinincreasedliabilityandcoststoAirCanadaandwhichcouldadverselyimpactAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.

In2018,theFederalGovernmentproposedtheAir Passenger Protection RegulationspursuantforadoptionundertheCanada Transportation Act,whicharestatedtogovernflightsto,fromandwithinCanada,includingconnectingflights.Theproposedregulations,whichhavebeenpublishedforcommentsandarescheduledtobeinforceonJuly1,2019,specifyrequirementsgoverningacarrier’sobligationsinthecaseofflightdelay,cancellationordenialofboarding,aswellasminimumstandardsoftreatment,compensationandassistanceincompletingtheplanneditinerary.Theregulationsprescribeminimumcompensationforlostordamagedbaggage,obligationswithrespecttodelaysoverthreehourswhereanaircraftisonthetarmac,andacarrier’sobligationtoseatyoungchildrennearaparent,guardianortutor.TheMinisterofTransportisalsoauthorizedtoordertheCanadianTransportationAgencytomakeregulationsrespectinganyofacarrier’sotherobligationstowardspassengers.

Epidemic diseases –Epidemicdiseasescouldimpactpassengerdemandforairtravel

Outbreaksorthethreatofoutbreaksofvirusesorothercontagionsorepidemicdiseases,includinginfluenza,SARS,Ebola,Zika,aswellasanytravelorotheradvisoriesrelatingtosame,whetherdomesticorinternationalorwhetherrelatingtoCanadiancitiesorregionsorothercities,regionsorcountries,couldhaveamaterialadverseeffectondemandforairtravelandcouldresultinamajornegativeimpactontrafficonAirCanada’snetwork.AnyresultingreductionintrafficinthemarketsservedbyAirCanadacouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.

Availability of insurance coverage and increased insurance costs –IncreasesininsurancecostsorreductionininsurancecoveragecouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition

Theaviationinsuranceindustryhasbeencontinuallyre-evaluatingtheterrorismrisksthatitcoverswhichmayadverselyaffectsomeofAirCanada’sexistinginsurancecarriersorAirCanada’sabilitytoobtainfutureinsurancecoverage(includingwarriskinsurancecoverage).TotheextentthatAirCanada’sexistinginsurancecarriersareunableorunwillingtoprovideitwithinsurancecoverageandintheabsenceofmeasuresbytheGovernmentofCanadatoprovidetherequiredcoverage,AirCanada’sinsurancecostsmayincreasefurtherandmayresultinAirCanadabeinginbreachofregulatoryrequirementsorcontractualarrangementsrequiringthatspecificinsurancebemaintained,whichcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.

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19. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures and Internal Controls over Financial Reporting

DisclosurecontrolsandprocedureswithintheCorporationhavebeendesignedtoprovidereasonableassurancethatallrelevantinformationisidentifiedtoitsPresidentandChiefExecutiveOfficer(“CEO”),itsDeputyChiefExecutiveOfficerandChiefFinancialOfficer(“CFO”)anditsDisclosurePolicyCommitteetoensureappropriateandtimelydecisionsaremaderegardingpublicdisclosure.

Internalcontrolsoverfinancialreportinghavebeendesignedbymanagement,underthesupervisionof,andwiththeparticipationoftheCorporation’sCEOandCFO,toprovidereasonableassuranceregardingthereliabilityoftheCorporation’sfinancialreportinganditspreparationoffinancialstatementsforexternalpurposesinaccordancewithGAAP.

TheCorporationwillfilecertifications,signedbytheCorporation’sCEOandCFO,withtheCanadianSecuritiesAdministrators(“CSA”)uponfilingoftheCorporation’sAnnualInformationForm.Inthosefilings,theCorporation’sCEOandCFOwillcertify,asrequiredbyNationalInstrument52-109,theappropriatenessofthefinancialdisclosure,thedesignandeffectivenessoftheCorporation’sdisclosurecontrolsandproceduresandthedesignandeffectivenessofinternalcontrolsoverfinancialreporting.TheCorporation’sCEOandCFOalsocertifytheappropriatenessofthefinancialdisclosuresintheCorporation’sinterimfilingswithsecuritiesregulators.Inthoseinterimfilings,theCorporation’sCEOandCFOalsocertifythedesignoftheCorporation’sdisclosurecontrolsandproceduresandthedesignofinternalcontrolsoverfinancialreporting.

TheCorporation’sAudit,FinanceandRiskCommitteereviewedthisMD&Aandtheauditedconsolidatedfinancialstatements,andtheCorporation’sBoardofDirectorsapprovedthesedocumentspriortotheirrelease.

Management’s Report on Disclosure Controls and Procedures

Management,underthesupervisionofandwiththeparticipationoftheCorporation’sCEOandCFO,evaluatedtheeffectivenessoftheCorporation’sdisclosurecontrolsandprocedures(asdefinedunderNationalInstrument52-109)andconcluded,asatDecember31,2018,thatsuchdisclosurecontrolsandprocedureswereeffective.

Management’s Report on Internal Controls over Financial Reporting

Management,underthesupervisionofandwiththeparticipationoftheCorporation’sCEOandCFO,evaluatedtheeffectivenessoftheCorporation’sinternalcontrolsoverfinancialreporting(asdefinedunderNationalInstrument52-109).Inmakingthisevaluation,managementusedthecriteriasetforthbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommissions(“COSO”)inInternalControl-IntegratedFramework(2013).Basedonthatevaluation,managementandtheCEOandCFOhaveconcludedthat,asatDecember31,2018,theCorporation’sinternalcontrolsoverfinancialreportingwereeffective.ThisevaluationtookintoconsiderationtheCorporation’sCorporateDisclosurePolicyandthefunctioningofitsDisclosurePolicyCommittee.

Changes in Internal Controls over Financial Reporting

TherehavebeennochangestotheCorporation’sinternalcontrolsoverfinancialreportingduringtheyearendedDecember31,2018thathavemateriallyaffected,orarereasonablylikelytomateriallyaffect,itsinternalcontrolsoverfinancialreporting.

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20. NON-GAAP FINANCIAL MEASURES

Belowisadescriptionofcertainnon-GAAPfinancialmeasuresusedbyAirCanadatoprovidereaderswithadditionalinformationonitsfinancialandoperatingperformance.SuchmeasuresarenotrecognizedmeasuresforfinancialstatementpresentationunderGAAP,donothavestandardizedmeanings,maynotbecomparabletosimilarmeasurespresentedbyotherentitiesandshouldnotbeconsideredasubstitutefororsuperiortoGAAPresults.

EBITDAR

EBITDAR(earningsbeforeinterest,taxes,depreciation,amortization,impairmentandaircraftrent)iscommonlyusedintheairlineindustryandisusedbyAirCanadaasameanstoviewoperatingresultsbeforeinterest,taxes,depreciation,amortization,impairmentandaircraftrentasthesecostscanvarysignificantlyamongairlinesduetodifferencesinthewayairlinesfinancetheiraircraftandotherassets.AirCanadaexcludesspecialitemsfromEBITDARastheseitemsmaydistorttheanalysisofcertainbusinesstrendsandrendercomparativeanalysistootherairlineslessmeaningful.

EBITDARisreconciledtooperatingincomeasfollows:


(Canadiandollarsinmillions) 2018 2017(1) $Change 2018 2017(1) $Change

Operating income – GAAP $ 122 $ 133 $ (11) $ 1,174 $ 1,371 $ (197)

Add back (as reflected on Air Canada’s consolidated statement of operations):

Depreciation,amortizationandimpairment 267 245 22 1,080 956 124Aircraftrent 133 126 7 518 503 15

Add back (included in Regional airlines expense):

Depreciation,amortizationandimpairment 11 7 4 38 28 10Aircraftrent 10 10 - 41 40 1EBITDAR (including special items) $ 543 $ 521 $ 22 $ 2,851 $2,898 $ (47)Removeeffectofspecialitems(2) - - - - 30 (30)EBITDAR (excluding special items) $ 543 $ 521 $ 22 $ 2,851 $ 2,928 $ (77)


(2)Inthefirstquarterof2017,AirCanadarecordedaprovisionof$30millionrelatingtoafinewhichwasreinstatedbyadecisionoftheEuropeanCommissionpertainingtocargoinvestigations.

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Adjusted CASM

AirCanadausesadjustedCASMasameanstoassesstheoperatingandcostperformanceofitsongoingairlinebusinesswithouttheeffectsofaircraftfuelexpense,thecostofgroundpackagesatAirCanadaVacationsandspecialitemsastheseitemsmaydistorttheanalysisofcertainbusinesstrendsandrendercomparativeanalysistootherairlineslessmeaningful.

IncalculatingadjustedCASM,aircraftfuelexpenseisexcludedfromoperatingexpenseresultsasitfluctuateswidelydependingonmanyfactors,includinginternationalmarketconditions,geopoliticalevents,jetfuelrefiningcostsandCanada/U.S.currencyexchangerates.AirCanadaalsoincursexpensesrelatedtogroundpackagesatAirCanadaVacationswhichsomeairlines,withoutcomparabletouroperatorbusinesses,maynotincur.Inaddition,thesecostsdonotgenerateASMsandthereforeexcludingthesecostsfromoperatingexpenseresultsprovidesforamoremeaningfulcomparisonacrossperiodswhensuchcostsmayvary.

Excludingaircraftfuelexpense,thecostofgroundpackagesatAirCanadaVacationsandspecialitemsfromoperatingexpensesgenerallyallowsformoremeaningfulanalysisofAirCanada’soperatingexpenseperformanceandamoremeaningfulcomparisontothoseofotherairlines.

AdjustedCASMisreconciledtoGAAPoperatingexpenseasfollows:


(Canadiandollarsinmillions,exceptwhereindicated) 2018 2017(1) $Change 2018 2017(1) $Change

Operating expense – GAAP $ 4,124 $ 3,687 $ 437 $16,891 $14,881 $ 2,010Adjusted for:

Aircraftfuelexpense(asreflectedonAirCanada’sconsolidatedstatementofoperations)

(958) (735) (223) (3,969) (2,927) (1,042)

Aircraftfuelexpense(includedinRegionalairlinesexpense)

(133) (112) (21) (531) (412) (119)

Groundpackagecosts (126) (106) (20) (602) (538) (64)Specialitems(2) - - - - (30) 30

Operating expense, adjusted for the above-noted items

$ 2,907 $ 2,734 $ 173 $ 11,789 $ 10,974 $ 815

ASMs (millions) 25,598 24,191 5.8% 110,866 103,492 7.1%Adjusted CASM (cents) ¢ 11.36 ¢ 11.30 0.5% ¢ 10.63 ¢ 10.60 0.3%



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Adjusted Pre-tax Income

Adjustedpre-taxincomeisusedbyAirCanadatoassesstheoverallpre-taxfinancialperformanceofitsbusinesswithouttheeffectsofforeignexchangegainsorlosses,netfinancingexpenserelatingtoemployeebenefits,gainsorlossesonfinancialinstrumentsrecordedatfairvalue,gainsorlossesonsaleandleasebackofassets,gainsorlossesondebtsettlementsandmodifications,gainsorlossesondisposalofassets,andspecialitemsastheseitemsmaydistorttheanalysisofcertainbusinesstrendsandrendercomparativeanalysistootherairlineslessmeaningful.AirCanadausesadjustedpre-taxincomebeforeinteresttodeterminereturnoninvestedcapital.

Adjustedpre-taxincomeisreconciledtoGAAPincome(loss)beforeincometaxesasfollows:


(Canadiandollarsinmillions) 2018 2017(1) $Change 2018 2017(1) $Change

Income (loss) before income taxes $ (216) $ 20 $ (236) $ 405 $ 1,286 $ (881)Adjusted for:Specialitems(2) - - - - 30 (30)Foreignexchange(gain)loss 269 62 207 317 (120) 437


12 18 (6) 50 65 (15)

(Gain)lossonfinancialinstrumentsrecordedatfairvalue

3 1 2 1 (23) 24

Gainonsaleandleasebackofassets - - - - (52) 52

(Gain)lossondebtsettlementsandmodifications

- (24) 24 (9) (21) 12

Lossondisposalofassets(3) - - - 188 - 188Adjusted pre-tax income $ 68 $ 77 $ (9) $ 952 $ 1,165 $ (213)



(3)In2018,AirCanadarecordedalossondisposalofassetsof$188millionrelatedtothesaleof25Embraer190aircraft.

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Adjusted Net Income (Loss) and Adjusted Earnings (Loss) per Share – Diluted

AirCanadausesadjustednetincome(loss)andadjustedearnings(loss)pershare–dilutedasameanstoassesstheoverallfinancialperformanceofitsbusinesswithouttheafter-taxeffectsofforeignexchangegainsorlosses,netfinancingexpenserelatingtoemployeebenefits,gainsorlossesonfinancialinstrumentsrecordedatfairvalue,gainsorlossesonsaleandleasebackofassets,gainsorlossesondebtsettlementsandmodifications,gainsorlossesondisposalofassets,andspecialitemsastheseitemsmaydistorttheanalysisofcertainbusinesstrendsandrendercomparativeanalysistootherairlineslessmeaningful.Startingasofandincludingthefourthquarterof2017,adjustednetincomeisdeterminednetoftax.Accordingly,the2018and2017informationinthetablebelowisnotdirectlycomparable.

AdjustednetincomeisreconciledtoGAAPnetincome(loss)asfollows:


(Canadiandollarsinmillions,exceptpersharefigures) 2018 2017(1) $Change 2018 2017(1) $Change

Net income (loss) $ (231) $ 8 $ (239) $ 167 $ 2,029 $ (1,862)Adjusted for: Specialitems(2) - - - - 30 (30)

Recoveryofdeferredincometaxes(one-time)(3) - - - - (759) 759

Foreignexchange(gain)loss 273 57 216 339 (125) 464


10 13 (3) 37 60 (23)

Gainonfinancialinstrumentsrecordedatfairvalue

3 - 3 1 (23) 24

Gainonsaleandleasebackofassets - - - - (52) 52Lossondebtsettlementsandmodifications (5) (18) 13 (4) (15) 11Lossondisposalofassets(4) 4 - 4 137 - 137Adjusted net income $ 54 $ 60 $ (6) $ 677 $ 1,145 $ (468)

Weightedaveragenumberofoutstandingsharesusedincomputingdilutedincomepershare(inmillions)

275 278 (3) 276 278 (2)

Adjusted earnings per share – diluted $ 0.20 $ 0.22 $ (0.02) $ 2.45 $ 4.11 $ (1.66)


(2)Inthefirstquarterof2017,AirCanadarecordedaprovisionof$30millionrelatingtoafinewhichwasreinstatedbyadecisionoftheEuropeanCommissionpertainingtocargoinvestigations

(3)In2017,AirCanadarecordedataxrecoveryof$743million(representingadeferredincometaxrecoveryof$759millionandacurrentincometaxexpenseof$16million).Thisdeferredincometaxrecoverywasexcludedfromadjustednetincomeasitreflectedaone-timerecognitionofpreviouslyunrecognizedincometaxassets.

(4)In2018,AirCanadarecordedalossondisposalofassetsof$188millionrelatedtothesaleof25Embraer190aircraft.

Thefollowingreflectstheshareamountsusedinthecomputationofbasicanddilutedearningspershareonanadjusted-earningspersharebasis:


(inmillions) 2018 2017 2018 2017

Weighted average number of shares outstanding – basic 271 274 272 273Effectofdilution 4 4 4 5Weighted average number of shares outstanding – diluted 275 278 276 278

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Return on Invested Capital

AirCanadausesreturnoninvestedcapital(“ROIC”)asameanstoassesstheefficiencywithwhichitallocatesitscapitaltogeneratereturns.Returnisbasedonadjustedpre-taxincome(orloss,asapplicable),excludinginterestexpenseandimplicitinterestonoperatingleases.Investedcapitalincludes(i)averageyear-over-yearlong-termdebt,averageyear-over-yearfinanceleaseobligations,averageyear-over-yearshareholders’equityand(ii)thevalueofcapitalizedoperatingleases(calculatedbymultiplyingannualizedaircraftrentby7).AirCanadacalculatesinvestedcapitalbasedonabookvalue-basedmethodofcalculatingROIC,asdescribedabove.FollowinganincreaseinAirCanada’stotalcash,cashequivalentsandshort-terminvestments,AirCanadareviseditsmethodologytoreducetheaverageyear-over-yearbookvalueofshareholders’equitybyexcesscashnotrequiredtorunitscorebusinessoperations.AirCanadausesaverageyear-over-yearadvanceticketsalesasaproxyfortheminimumcashrequiredforongoingcorebusinessoperations.Thischangeresultsininvestedcapitalmorecloselyreflectingoperatingcapital.Refertothedefinitionofadjustedpre-taxincome(loss)foradiscussionastowhyAirCanadausesthismeasuretoassesstheoverallpre-taxfinancialperformanceofitsbusiness.

ReturnoninvestedcapitalisreconciledtoGAAPincomebeforeincometaxesasfollows:

12 Months Ended

(Canadiandollarsinmillions,exceptwhereindicated)December 31,

2018December31,

2017(1)$Change

Income before income taxes $ 405 $ 1,286 $ (881)Remove:Specialitems(2) - 30 (30)Foreignexchangeloss(gain) 317 (120) 437Netfinancingexpenserelatingtoemployeebenefits 50 65 (15)Loss(gain)onfinancialinstrumentsrecordedatfairvalue 1 (23) 24Gainonsaleandleasebackofassets - (52) 52Gainondebtsettlementsandmodifications(3) (9) (21) 12Lossondisposalofassets(4) 188 - 188Adjusted pre-tax income $ 952 $ 1,165 $ (213)Adjusted for:Interestexpense 331 311 20Implicitinterestonoperatingleases(5) 274 266 8Adjusted pre-tax income before interest $ 1,557 $ 1,742 $ (185)Invested capital:Averagelong-termdebtandfinanceleaseobligations 6,386 6,369 17Averageshareholders’equity,netofexcesscash 2,065 1,249 816Capitalizedoperatingleases(6) 3,913 3,801 112Invested capital $ 12,364 $ 11,419 $ 945Return on invested capital (%) 12.6 15.3 (2.7) pp


(2)Specialitemsforthe12monthsendedDecember31,2017includedaprovisionof$30millionrelatedtocargoinvestigations.(3)Gainondebtsettlementsandmodificationsforthe12monthsendedDecember31,2018of$9millionincludedagainof$11millionrelated

totherepricingofitsUS$1.1billionseniorsecuredcreditfacilityandalossof$2millionrelatedtotheprepaymentoffixedratedebt. Gainondebtsettlementsandmodificationsforthe12monthsendedDecember31,2017of$21millionincludedagainof$27millionrelated

totherepricingofitsUS$1.1billionseniorsecuredcreditfacility,alossof$3millionrelatedtotheearlyexerciseofapurchaseoptionforanAirbus330aircraftandalossof$2millionrelatedtotheprepaymentoffixedratedebtonfourEmbraer190aircraft.

(4)In2018,AirCanadadisposedof25Embraer190aircraftresultinginalossondisposalof$188million.(5)Interestimplicitonoperatingleasesisequalto7.0%of7timesthetrailing12monthsofaircraftrent.7.0%isaproxyanddoesnot

necessarilyrepresenttheactualimplicitinterestonoperatingleasesforanygivenperiod.(6)Capitalizedoperatingleasesarecalculatedbymultiplyingthetrailing12monthsofaircraftrentby7.Aircraftrenttotaled$559millionforthe

12monthsendedDecember31,2018and$543millionforthe12monthsendedDecember31,2017(includesaircraftrentrelatedtoregionaloperations).

2018 ANNUAL REPORT


Adjusted Net Debt to Trailing 12-Month EBITDAR (Leverage Ratio)

Adjustednetdebttotrailing12-monthEBITDARratio(alsoreferredtoas“leverageratio”inthisMD&A)iscommonlyusedintheairlineindustryandisusedbyAirCanadaasameanstomeasurefinancialleverage.Leverageratioiscalculatedbydividingadjustednetdebtbytrailing12-monthEBITDAR.Asmentionedabove,AirCanadaexcludesspecialitemsfromEBITDARresults(whichareusedtodetermineleverageratio)assuchitemswoulddistorttheanalysisofcertainbusinesstrendsandrendercomparativeanalysistootherairlineslessmeaningful.Refertosection9.3“AdjustedNetDebt”ofthisMD&Aforareconciliationofthisnon-GAAPfinancialmeasuretothenearestmeasureunderGAAP.

Free Cash FlowFreecashflowiscommonlyusedintheairlineindustryandisusedbyAirCanadaasanindicatorofthefinancialstrengthandperformanceofitsbusiness,indicatingtheamountofcashAirCanadaisabletogeneratefromoperationsandaftercapitalexpenditures.Freecashflowiscalculatedasnetcashflowsfromoperatingactivitiesminusadditionstoproperty,equipmentandintangibleassets,andisnetofproceedsfromsaleandleasebacktransactions.Refertosection9.5“ConsolidatedCashFlowMovements”ofthisMD&Aforareconciliationofthisnon-GAAPfinancialmeasuretothenearestmeasureunderGAAP.

2018 ANNUAL REPORT


21. GLOSSARY

Adjusted CASM–ReferstooperatingexpenseperASMadjustedtoremovetheeffectsofaircraftfuelexpense,groundpackagescostsatAirCanadaVacations,andspecialitems.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.

Adjusted net income (loss)–Referstotheconsolidatednetincome(loss)ofAirCanadaadjustedtoremovetheafter-taxeffectsofforeignexchangegainsorlosses,netfinancingincome(expense)relatingtoemployeebenefits,gainsorlossesonfinancialinstrumentsrecordedatfairvalue,gainsorlossesonsaleandleasebackofassets,gainsorlossesondebtsettlementsandmodifications,gainsorlossesondisposalofassets,andspecialitems.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.

Adjusted pre-tax income (loss)–Referstotheconsolidatedincome(loss)ofAirCanadabeforeincometaxesandadjustedtoremovetheeffectsofforeignexchangegainsorlosses,netfinancingincome(expense)relatingtoemployeebenefits,gainsorlossesonfinancialinstrumentsrecordedatfairvalue,gainsorlossesonsaleandleasebackofassets,gainsorlossesondebtsettlementsandmodifications,gainsorlossesondisposalofassets,andspecialitems.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.

Air Georgian –ReferstoAirGeorgianLimited.

Atlantic passenger and cargo revenues–RefertorevenuesfromflightsthatcrosstheAtlanticOceanwithoriginsanddestinationsprincipallyinEurope,India,theMiddleEastandNorthAfrica.

Available seat miles or ASMs–Referstoameasureofpassengercapacitycalculatedbymultiplyingthetotalnumberofseatsavailableforpassengersbythemilesflown.

Average stage length–ReferstotheaveragemileperdepartureseatandiscalculatedbydividingtotalASMsbytotalseatsdispatched.

Boeing–ReferstoTheBoeingCompany.

Bombardier–ReferstoBombardierInc.

CALDA–ReferstotheCanadianAirlineDispatchersAssociation.

CASM–ReferstooperatingexpenseperASM.

CUPE–ReferstotheCanadianUnionofPublicEmployees.

Domestic passenger and cargo revenues–RefertorevenuesfromflightswithinCanada.

EBITDAR–Referstoearningsbeforeinterest,taxes,depreciation,amortization,impairmentandaircraftrent.EBITDARisanon-GAAPfinancialmeasure.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.AirCanadaexcludesspecialitemsfromEBITDAR.

EVAS–ReferstoExploitsValleyAirServicesLimited.

Free cash flow–Referstonetcashflowsfromoperatingactivitiesminusadditionstoproperty,equipmentandintangibleassets,andisnetofproceedsfromsaleandleasebacktransactions.Freecashflowisanon-GAAPfinancialmeasure.Refertosections9.5and20ofthisMD&Aforadditionalinformation.

IAMAW–ReferstotheInternationalAssociationofMachinistsandAerospaceWorkers.

Jazz–ReferstoJazzAviationLP.

Jazz CPA–ReferstothecapacitypurchaseagreementbetweenAirCanadaandJazzdatedJanuary1,2015whichbecameeffectiveonJanuary1,2015.

Leverage ratio–Referstotheratioofadjustednetdebttotrailing12-monthEBITDAR(calculatedbydividingadjustednetdebtbytrailing12-monthEBITDAR).Leverageratioisanon-GAAPfinancialmeasure.Refertosections9.3and20ofthisMD&Aforadditionalinformation.

Loss (gain) on debt settlements and modifications–Refertogainsorlossesrelatedtodebtsettlementsandmodificationsthat,inmanagement’sview,aretobeseparatelydisclosedbyvirtueoftheirsizeorincidencetoenableafullerunderstandingoftheCorporation’sfinancialperformance.

Other passenger and cargo revenues –RefertorevenuesfromflightswithoriginsanddestinationsprincipallyinCentralandSouthAmerica,theCaribbeanandMexico.

Pacific passenger and cargo revenues–RefertorevenuesfromflightsthatcrossthePacificOceanwithoriginsanddestinationsprincipallyinAsiaandAustralia.

Passenger load factor–ReferstoameasureofpassengercapacityutilizationderivedbyexpressingRevenuePassengerMilesasapercentageofAvailableSeatMiles.

Passenger revenue per available seat mile or PRASM–ReferstoaveragepassengerrevenueperASM.

Percentage point (pp)–Referstoameasureforthearithmeticdifferenceoftwopercentages.

2018 ANNUAL REPORT


Return on invested capital or ROIC–Referstoreturnoninvestedcapitalandisameasureusedtoassesstheefficiencywithwhichacompanyallocatesitscapitaltogeneratereturns.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.

Revenue passenger carried –ReferstotheInternationalAirTransportAssociation’s(IATA)definitionofpassengercarriedwherebypassengersarecountedonaflightnumberbasisratherthanbyjourney/itineraryorbyleg.

Revenue passenger miles or RPMs –Referstoameasureofpassengertrafficcalculatedbymultiplyingthetotalnumberofrevenuepassengerscarriedbythemilestheyarecarried.

Seats dispatched–Referstothenumberofseatsonnon-stopflights.Anon-stopflightreferstoasingletakeoffandlanding.

Sky Regional –ReferstoSkyRegionalAirlinesInc.

Special items–Refertothoseitemsthat,inmanagement’sview,aretobeseparatelydisclosedbyvirtueoftheirsignificancetothefinancialstatements,toenableafullerunderstandingoftheCorporation’sfinancialperformance.

Toronto Pearson–referstoLesterB.PearsonInternationalAirport.

Unifor–ReferstothetradeunioninCanada,launchedin2013,asamergeroftheCanadianAutoWorkersandCommunications,EnergyandPaperworkersunions.

Weighted average cost of capital or WACC–Referstomanagement’sestimateofitscostofcapital,inwhicheachcategoryofcapitalisproportionatelyweighted.

Yield–ReferstoaveragepassengerrevenueperRPM.

2018

CONSOLIDATED FINANCIAL STATEMENTS AND NOTES

PHOTOS

EXTERIORAIRBUSS.A.S2019–COMPUTERRENDERINGBYFIXION.PHOTOBYDREAMSTIME–MMS–2019

INTERIOROFAIRCANADABOEING737MAX8.PHOTOBYBRIANLOSITO

2018 ANNUAL REPORT

ConsolidatedFinancialStatementsandNotes | 97

STATEMENT OF MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING

Theconsolidatedfinancialstatementshavebeenpreparedbymanagement.ManagementisresponsibleforthefairpresentationoftheconsolidatedfinancialstatementsinconformitywithgenerallyacceptedaccountingprinciplesinCanadawhichincorporatesInternationalFinancialReportingStandards,asissuedbytheInternationalAccountingStandardsBoard.Managementisresponsiblefortheselectionofaccountingpoliciesandmakingsignificantaccountingjudgementsandestimates.Managementisalsoresponsibleforallotherfinancialinformationincludedinmanagement’sdiscussionandanalysisandforensuringthatthisinformationisconsistent,whereappropriate,withtheinformationcontainedintheconsolidatedfinancialstatements.

Managementisresponsibleforestablishingandmaintainingadequateinternalcontroloverfinancialreportingwhichincludesthosepoliciesandproceduresthatprovidereasonableassuranceoverthesafeguardingofassetsandoverthecompleteness,fairnessandaccuracyoftheconsolidatedfinancialstatementsandotherfinancialinformation.

TheAudit,FinanceandRiskCommittee,whichiscomprisedentirelyofindependentdirectors,reviewsthequalityandintegrityoftheCorporation’sfinancialreportingandprovidesitsrecommendations,inrespectoftheapprovalofthefinancialstatements,totheBoardofDirectors;overseesmanagement’sresponsibilitiesastotheadequacyofthesupportingsystemsofinternalcontrols;providesoversightoftheindependence,qualificationsandappointmentoftheexternalauditor;and,pre-approvesaudit,audit-related,andnon-auditfeesandexpenses.TheBoardofDirectorsapprovestheCorporation’sconsolidatedfinancialstatementsandmanagement’sdiscussionandanalysisdisclosurespriortotheirrelease.TheAudit,FinanceandRiskCommitteemeetswithmanagement,theinternalauditorsandexternalauditorsatleastfourtimeseachyeartoreviewanddiscussfinancialreporting,disclosures,auditingandothermatters.

Theexternalauditors,PricewaterhouseCoopersLLP,conductanindependentauditoftheconsolidatedfinancialstatementsinaccordancewithCanadiangenerallyacceptedauditingstandardsandexpresstheiropinionthereon.Thosestandardsrequirethattheauditisplannedandperformedtoobtainreasonableassuranceaboutwhethertheconsolidatedfinancialstatementsasawholearefreeofmaterialmisstatement.TheexternalauditorshaveunlimitedaccesstotheAudit,FinanceandRiskCommitteeandmeetwiththeCommitteeonaregularbasis.

Calin Rovinescu Michael Rousseau PresidentandChiefExecutiveOfficer DeputyChiefExecutiveOfficerand ChiefFinancialOfficer

February14,2019

2018 ANNUAL REPORT

98 | ConsolidatedFinancialStatementsandNotes

INDEPENDENT AUDITOR’S REPORT

TotheShareholdersofAirCanada

Our opinionInouropinion,theaccompanyingconsolidatedfinancialstatementspresentfairly,inallmaterialrespects,thefinancialpositionofAirCanadaanditssubsidiaries(together,theCorporation)asatDecember31,2018and2017andJanuary1,2017,anditsfinancialperformanceanditscashflowsfortheyearsendedDecember31,2018and2017inaccordancewithInternationalFinancialReportingStandardsasissuedbytheInternationalAccountingStandardsBoard(IFRS).

WhatwehaveauditedTheCorporation’sconsolidatedfinancialstatementscomprise:

> theconsolidatedstatementsoffinancialpositionasatDecember31,2018and2017andJanuary1,2017;> theconsolidatedstatementsofoperationsfortheyearsendedDecember31,2018and2017;> theconsolidatedstatementsofcomprehensiveincomefortheyearsendedDecember31,2018and2017;> theconsolidatedstatementsofchangesinequityfortheyearsendedDecember31,2018and2017;> theconsolidatedstatementsofcashflowfortheyearsendedDecember31,2018and2017;and> thenotestotheconsolidatedfinancialstatements,whichincludeasummaryofsignificantaccountingpolicies.

Basis for opinionWeconductedourauditinaccordancewithCanadiangenerallyacceptedauditingstandards.OurresponsibilitiesunderthosestandardsarefurtherdescribedintheAuditor’s responsibilities for the audit of the consolidated financial statements sectionofourreport.

Webelievethattheauditevidencewehaveobtainedissufficientandappropriatetoprovideabasisforouropinion.

IndependenceWeareindependentoftheCorporationinaccordancewiththeethicalrequirementsthatarerelevanttoourauditoftheconsolidatedfinancialstatementsinCanada.Wehavefulfilledourotherethicalresponsibilitiesinaccordancewiththeserequirements.

Other informationManagementisresponsiblefortheotherinformation.TheotherinformationcomprisestheManagement’sDiscussionandAnalysis,whichweobtainedpriortothedateofthisauditor’sreportandtheinformation,otherthantheconsolidatedfinancialstatementsandourauditor’sreportthereon,includedintheannualreport,whichisexpectedtobemadeavailabletousafterthatdate.

Ouropinionontheconsolidatedfinancialstatementsdoesnotcovertheotherinformationandwedonotandwillnotexpressanopinionoranyformofassuranceconclusionthereon.

Inconnectionwithourauditoftheconsolidatedfinancialstatements,ourresponsibilityistoreadtheotherinformationidentifiedaboveand,indoingso,considerwhethertheotherinformationismateriallyinconsistentwiththeconsolidatedfinancialstatementsorourknowledgeobtainedintheaudit,orotherwiseappearstobemateriallymisstated.

If,basedontheworkwehaveperformedontheotherinformationthatweobtainedpriortothedateofthisauditor’sreport,weconcludethatthereisamaterialmisstatementofthisotherinformation,wearerequiredtoreportthatfact.Wehavenothingtoreportinthisregard.Whenwereadtheinformation,otherthantheconsolidatedfinancialstatementsandourauditor’sreportthereon,includedintheannualreport,ifweconcludethatthereisamaterialmisstatementtherein,wearerequiredtocommunicatethemattertothosechargedwithgovernance.

Responsibilities of management and those charged with governance for the consolidated financial statementsManagementisresponsibleforthepreparationandfairpresentationoftheconsolidatedfinancialstatementsinaccordancewithIFRS,andforsuchinternalcontrolasmanagementdeterminesisnecessarytoenablethepreparationofconsolidatedfinancialstatementsthatarefreefrommaterialmisstatement,whetherduetofraudorerror.

2018 ANNUAL REPORT


Inpreparingtheconsolidatedfinancialstatements,managementisresponsibleforassessingtheCorporation’sabilitytocontinueasagoingconcern,disclosing,asapplicable,mattersrelatedtogoingconcernandusingthegoingconcernbasisofaccountingunlessmanagementeitherintendstoliquidatetheCorporationortoceaseoperations,orhasnorealisticalternativebuttodoso.

ThosechargedwithgovernanceareresponsibleforoverseeingtheCorporation’sfinancialreportingprocess.

Auditor’s responsibilities for the audit of the consolidated financial statementsOurobjectivesaretoobtainreasonableassuranceaboutwhethertheconsolidatedfinancialstatementsasawholearefreefrommaterialmisstatement,whetherduetofraudorerror,andtoissueanauditor’sreportthatincludesouropinion.Reasonableassuranceisahighlevelofassurance,butisnotaguaranteethatanauditconductedinaccordancewithCanadiangenerallyacceptedauditingstandardswillalwaysdetectamaterialmisstatementwhenitexists.Misstatementscanarisefromfraudorerrorandareconsideredmaterialif,individuallyorintheaggregate,theycouldreasonablybeexpectedtoinfluencetheeconomicdecisionsofuserstakenonthebasisoftheseconsolidatedfinancialstatements.

AspartofanauditinaccordancewithCanadiangenerallyacceptedauditingstandards,weexerciseprofessionalJudgementandmaintainprofessionalskepticismthroughouttheaudit.Wealso:

> Identifyandassesstherisksofmaterialmisstatementoftheconsolidatedfinancialstatements,whetherduetofraudorerror,designandperformauditproceduresresponsivetothoserisks,andobtainauditevidencethatissufficientandappropriatetoprovideabasisforouropinion.Theriskofnotdetectingamaterialmisstatementresultingfromfraudishigherthanforoneresultingfromerror,asfraudmayinvolvecollusion,forgery,intentionalomissions,misrepresentations,ortheoverrideofinternalcontrol.

> Obtainanunderstandingofinternalcontrolrelevanttotheauditinordertodesignauditproceduresthatareappropriateinthecircumstances,butnotforthepurposeofexpressinganopinionontheeffectivenessoftheCorporation’sinternalcontrol.

> Evaluatetheappropriatenessofaccountingpoliciesusedandthereasonablenessofaccountingestimatesandrelateddisclosuresmadebymanagement.

> Concludeontheappropriatenessofmanagement’suseofthegoingconcernbasisofaccountingand,basedontheauditevidenceobtained,whetheramaterialuncertaintyexistsrelatedtoeventsorconditionsthatmaycastsignificantdoubtontheCorporation’sabilitytocontinueasagoingconcern.Ifweconcludethatamaterialuncertaintyexists,wearerequiredtodrawattentioninourauditor’sreporttotherelateddisclosuresintheconsolidatedfinancialstatementsor,ifsuchdisclosuresareinadequate,tomodifyouropinion.Ourconclusionsarebasedontheauditevidenceobtaineduptothedateofourauditor’sreport.However,futureeventsorconditionsmaycausetheCorporationtoceasetocontinueasagoingconcern.

> Evaluatetheoverallpresentation,structureandcontentoftheconsolidatedfinancialstatements,includingthedisclosures,andwhethertheconsolidatedfinancialstatementsrepresenttheunderlyingtransactionsandeventsinamannerthatachievesfairpresentation.

> ObtainsufficientappropriateauditevidenceregardingthefinancialinformationoftheentitiesorbusinessactivitieswithintheCorporationtoexpressanopinionontheconsolidatedfinancialstatements.Weareresponsibleforthedirection,supervisionandperformanceofthegroupaudit.Weremainsolelyresponsibleforourauditopinion.

Wecommunicatewiththosechargedwithgovernanceregarding,amongothermatters,theplannedscopeandtimingoftheauditandsignificantauditfindings,includinganysignificantdeficienciesininternalcontrolthatweidentifyduringouraudit.

Wealsoprovidethosechargedwithgovernancewithastatementthatwehavecompliedwithrelevantethicalrequirementsregardingindependence,andtocommunicatewiththemallrelationshipsandothermattersthatmayreasonablybethoughttobearonourindependence,andwhereapplicable,relatedsafeguards.

Theengagementpartnerontheauditresultinginthisindependentauditor’sreportisMichaelTrudeau.

Montreal,QuebecFebruary14,2019

1CPAauditor,PublicaccountancypermitNO.A113048

2018 ANNUAL REPORT


CONSOLIDATED STATEMENTS OF FINANCIAL POSITION


December 31,2018

December31,2017

Restated-Note2

January1,2017

Restated-Note2

AssetsCurrentCashandcashequivalents $ 630 $ 642 $ 787Short-terminvestments 4,077 3,162 2,192

Totalcash,cashequivalentsandshort-terminvestments

4,707 3,804 2,979

Restrictedcash Note2p 161 148 126Accountsreceivable Note18 796 814 707Aircraftfuelinventory 109 91 79Sparepartsandsuppliesinventory Note2q 111 115 107Prepaidexpensesandothercurrentassets Note18 417 425 447Totalcurrentassets 6,301 5,397 4,445Depositsandotherassets 444 465 468Propertyandequipment Note4 9,729 9,252 8,520Pensionassets Note8 1,969 1,583 1,153Deferredincometax Note10 39 456 -Intangibleassets Note5 404 318 315Goodwill Note6 311 311 311Total assets $ 19,197 $ 17,782 $ 15,212

LiabilitiesCurrentAccountspayableandaccruedliabilities $ 1,927 $ 1,961 $ 1,644Advanceticketsales Note18 2,717 2,469 2,119

Currentportionoflong-termdebtandfinanceleases

Note7 455 671 707

Totalcurrentliabilities 5,099 5,101 4,470Long-termdebtandfinanceleases Note7 6,197 5,448 5,911Pensionandotherbenefitliabilities Note8 2,547 2,592 2,436Maintenanceprovisions Note9 1,118 1,003 922Otherlong-termliabilities 151 167 153Deferredincometax Note10 52 49 49Total liabilities $ 15,164 $ 14,360 $ 13,941

Shareholders’ EquitySharecapital Note11 798 799 797Contributedsurplus 75 69 83Hedgingreserve - - 3Retainedearnings 3,160 2,554 388Totalshareholders’equity 4,033 3,422 1,271Total liabilities and shareholders’ equity $ 19,197 $ 17,782 $ 15,212

Theaccompanyingnotesareanintegralpartoftheconsolidatedfinancialstatements.

OnbehalfoftheBoardofDirectors:

Vagn Sørensen Christie J.B. Clark Chairman ChairoftheAudit,FinanceandRiskCommittee

2018 ANNUAL REPORT


CONSOLIDATED STATEMENTS OF OPERATIONS

FortheyearendedDecember31

(Canadiandollarsinmillionsexceptpersharefigures)2018 2017

Restated - Note 2

Operating revenuesPassenger Note18 $ 16,223 $ 14,593Cargo Note18 803 708Other 1,039 951Total revenues 18,065 16,252

Operating expensesAircraftfuel 3,969 2,927Regionalairlinesexpense Note19 2,842 2,617Wages,salariesandbenefits 2,873 2,671Airportandnavigationfees 964 905Aircraftmaintenance 1,003 938Depreciation,amortizationandimpairment 1,080 956Salesanddistributioncosts 807 770Groundpackagecosts 602 538Aircraftrent 518 503Cateringandonboardservices 433 383Communicationsandinformationtechnology 294 254Specialitems Note20 - 30Other 1,506 1,389Total operating expenses 16,891 14,881Operating income 1,174 1,371Non-operating income (expense)Foreignexchangegain(loss) (317) 120Interestincome 108 60Interestexpense (331) (311)Interestcapitalized 35 36Netfinancingexpenserelatingtoemployeebenefits Note8 (50) (65)Gain(loss)onfinancialinstrumentsrecordedatfairvalue Note15 (1) 23Gainonsaleandleasebackofassets Note21 - 52Gainondebtsettlementsandmodifications Note7 9 21Lossondisposalofassets Note21 (188) -Other (34) (21)Total non-operating expense (769) (85)Income before income taxes 405 1,286Incometax(expense)recovery Note10 (238) 743Net income $ 167 $ 2,029

Net income per share Note13Basicearningspershare $ 0.61 $ 7.44Dilutedearningspershare $ 0.60 $ 7.31


2018 ANNUAL REPORT


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



2018 2017

Restated-Note2

Comprehensive income Netincome $ 167 $ 2,029Othercomprehensiveincome,netoftaxexpense: Note10

ItemsthatwillnotbereclassifiedtonetincomeRemeasurementsonemployeebenefitliabilities Note8 503 189

ItemsthatwillbereclassifiedtonetincomeFuelderivativesdesignatedascashflowhedges,net Note15 - (3)

Total comprehensive income $ 670 $ 2,215

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY


Share capital

Contributed surplus

Hedging reserve

Retained earnings

Total shareholders’

equity

January1,2017(1) $ 797 $ 83 $ 3 $ 388 $ 1,271Netincome - - - 2,029 2,029Remeasurementsonemployeebenefitliabilities - - - 189 189Fuelderivativesdesignatedascashflowhedges,net - - (3) - (3)Totalcomprehensiveincome - - (3) 2,218 2,215Share-basedcompensation - - - 9 9Sharesissued(Note11) 14 (5) - - 9Sharespurchasedandcancelledunderissuerbid(Note11) (12) - - (59) (71)

Reclassificationofequitysettledawardtocashsettledaward(Note2i)

- (9) - (2) (11)

December31,2017(1) $ 799 $ 69 $ - $ 2,554 $ 3,422Netincome - - - 167 167Remeasurementsonemployeebenefitliabilities - - - 503 503Fuelderivativesdesignatedascashflowhedges,net - - - - -Totalcomprehensiveincome - - - 670 670Share-basedcompensation - 9 - - 9Sharesissued(Note11) 8 (3) - - 5Sharespurchasedandcancelledunderissuerbid(Note11) (9) - - (64) (73)December31,2018 $ 798 $ 75 $ - $ 3,160 $ 4,033

(1)Amountsforpriorperiodsasrestated–RefertoNote2


2018 ANNUAL REPORT


CONSOLIDATED STATEMENTS OF CASH FLOW


(Canadiandollarsinmillionsexceptpersharefigures)

2018 2017

Restated-Note2

Cash flows from (used for) Operating Netincome $ 167 $ 2,029Adjustmentstoreconciletonetcashfromoperations

Deferredincometax Note10 232 (759)Depreciation,amortizationandimpairment 1,118 984Foreignexchange(gain)loss Note15 328 (183)Gainonsaleandleasebackofassets Note21 - (52)Gainondebtsettlementsandmodifications Note7 (9) (21)Lossondisposalofassets Note21 188 -Employeebenefitfundinglessthanexpense Note8 257 237Financialinstrumentsrecordedatfairvalue Note15 14 (14)Changeinmaintenanceprovisions 98 125

Changesinnon-cashworkingcapitalbalances 267 342Other 35 50Net cash flows from operating activities 2,695 2,738

Financing Proceedsfromborrowings Note7 1,210 733Reductionoflong-termdebtandfinanceleaseobligations Note7 (1,170) (814)Sharespurchasedforcancellation Note11 (73) (71)Issueofshares 5 9Financingfees Note7 (12) (26)Net cash flows used in financing activities (40) (169)

Investing Short-terminvestments (848) (998)Additionstoproperty,equipmentandintangibleassets (2,197) (2,422)Proceedsfromsaleofassets 11 5Proceedsfromsaleandleasebackofassets Note21 293 740Other 47 (16)Net cash flows used in investing activities (2,694) (2,691)Effect of exchange rate changes on cash and cash equivalents 27 (23)Decrease in cash and cash equivalents (12) (145)Cashandcashequivalents,beginningofyear 642 787Cash and cash equivalents, end of year $ 630 $ 642


2018 ANNUAL REPORT


1. GENERAL INFORMATION

Theaccompanyingauditedconsolidatedfinancialstatements(the“financialstatements”)areofAirCanada(the“Corporation”).Theterm“Corporation”alsorefersto,asthecontextmayrequire,AirCanadaand/oroneormoreofitssubsidiaries,includingitsprincipalwholly-ownedoperatingsubsidiaries,TouramLimitedPartnershipdoingbusinessunderthebrandnameAirCanadaVacations®(“AirCanadaVacations”)andAirCanadaRougeLPdoingbusinessunderthebrandnameAirCanadaRouge®(“AirCanadaRouge”).

AirCanadaisincorporatedanddomiciledinCanada.Theaddressofitsregisteredofficeis7373Côte-VertuBoulevardWest,Saint-Laurent,Quebec.

AirCanadaisCanada’slargestdomestic,U.S.transborderandinternationalairlineandthelargestproviderofscheduledpassengerservicesintheCanadianmarket,theCanada-U.S.transbordermarketaswellastheinternationalmarketstoandfromCanada.CertainofthescheduledpassengerservicesofferedondomesticandCanada-U.S.transborderroutesareoperatedunderthebrandname“AirCanadaExpress”andoperatedbythirdpartiessuchasJazzAviationLP(“Jazz”)andSkyRegionalAirlinesInc.(“SkyRegional”)throughcapacitypurchaseagreements(eacha“CPA”).AirCanadaalsooffersscheduledpassengerservicesondomesticandCanada-U.S.transborderroutesthroughcapacitypurchaseagreementsonotherregionalcarriers,includingthoseoperatingaircraftof18seatsorless,someofwhicharereferredtoasTierIIIcarriers.ThroughAirCanada’sglobalroutenetwork,virtuallyeverymajormarketthroughouttheworldisservedeitherdirectlyorthroughtheStarAlliancenetwork.AirCanadaalsooffersaircargoservicesondomesticandU.S.transborderroutesaswellasoninternationalroutesbetweenCanadaandmajormarketsinEurope,Asia,SouthAmericaandAustralia.

FortheyearsendedDecember31,2018and2017(Canadiandollarsinmillions–exceptpershareamounts)

2018 ANNUAL REPORT


2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

TheCorporationpreparesitsfinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciplesinCanada(“GAAP”)assetoutintheCPACanadaHandbook–Accounting(“CPAHandbook”)whichincorporatesInternationalFinancialReportingStandards(“IFRS”)asissuedbytheInternationalAccountingStandardsBoard(“IASB”).

ThesefinancialstatementswereapprovedforissuebytheBoardofDirectorsoftheCorporationonFebruary14,2019.

Thesefinancialstatementsarebasedontheaccountingpoliciesasdescribedbelow.Thesepolicieshavebeenconsistentlyappliedtoalltheperiodspresented,exceptasotherwisestated.

Certaincomparativefigureshavebeenreclassifiedtoconformtothefinancialstatementpresentationadoptedforthecurrentyear.

a) Basis of measurement

Thesefinancialstatementshavebeenpreparedunderthehistoricalcostconvention,exceptfortherevaluationofcash,cashequivalents,short-terminvestments,restrictedcashandderivativeinstrumentswhicharemeasuredatfairvalue.

b) Principles of consolidation

ThesefinancialstatementsincludetheaccountsofAirCanadaanditssubsidiaries.Subsidiariesareallentities(includingstructuredentities)whichAirCanadacontrols.Foraccountingpurposes,controlisestablishedbyaninvestorwhenitisexposedto,orhasrightsto,variablereturnsfromitsinvolvementwiththeentityandhastheabilitytoaffectthosereturnsthroughitspowerovertheentity.Allinter-companybalancesandtransactionsareeliminated.

c) Passenger and cargo revenues

TheCorporationadoptedIFRS15RevenuefromContractswithCustomersonJanuary1,2018andapplieditretrospectivelytothepreviousperiods.TheimpactofthenewstandardontheconsolidatedfinancialstatementsissummarizedinNote2bb.

Passengerandcargorevenuesarerecognizedwhenthetransportationisprovided,exceptforrevenueonunlimitedflightpasseswhichisrecognizedonastraight-linebasisovertheperiodduringwhichthetravelpassisvalid.TheCorporationhasformedallianceswithotherairlinesencompassingloyaltyprogramparticipation,interlineagreementsandcodesharingandcoordinationofservicesincludingreservations,baggagehandlingandflightschedules.Revenuesareallocatedbaseduponformulasspecifiedintheagreementsandarerecognizedastransportationisprovided.Passengerrevenuealsoincludescertainfeesandsurchargesandrevenuesfrompassenger-relatedservicessuchasseatselectionandexcessbaggagewhicharerecognizedwhenthetransportationisprovided.

AirlinepassengerandcargoadvancesalesaredeferredandincludedinCurrentliabilities.AdvancesalesalsoincludetheproceedsfromthesaleofflightticketstoAimiaCanadaInc.(“Aeroplan”),acorporationthatprovidesloyaltyprogramservicestoAirCanadaandpurchasesseatsfromAirCanadapursuanttotheCommercialParticipationandServicesAgreementbetweenAeroplanandAirCanada(the“CPSA”).UndertheCPSA,AeroplanpurchasespassengerticketsfromAirCanada,whichareaccountedforaspassengerrevenuesbyAirCanadawhentransportationisprovided.AsfurtherdiscussedinNote23,AirCanadaacquiredAimiaCanadaInc.,ownerandoperatoroftheAeroplanloyaltybusiness,fromAimiaInc.inJanuary2019.

d) Capacity purchase agreements

AirCanadahascapacitypurchaseagreementswithJazz,SkyRegionalandcertainotherregionalcarriers.Undertheseagreements,AirCanadamarkets,ticketsandentersintoothercommercialarrangementsrelatingtotheseflightsandrecordstherevenueitearnsunderPassengerrevenuewhentransportationisprovided.Operatingexpensesundercapacitypurchaseagreements,whichareaggregatedinaseparatelineitemintheconsolidatedstatementofoperationstitledRegionalairlinesexpense,includethecapacitypurchasefees,pass-throughcosts,whicharedirectcostsincurredbytheregionalcarrierandchargedtotheCorporation,andothercostsincurredbytheCorporationwhicharedirectlyrelatedtoregionalcarrieroperations.

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e) Aeroplan loyalty program

AirCanadapurchasesAeroplanMiles®fromAeroplan.AirCanadaisanAeroplanpartnerprovidingcertainofAirCanada’scustomers,whoarealsomembersofAeroplan,withAeroplanMiles®,whichtheycanredeemasAeroplanmembersforairtravelorotherrewardsofferedbyAeroplanpursuanttoitsprogram.

ThecostofpurchasingAeroplanMiles®fromAeroplanisaccountedforasasalesincentiveandchargedagainstpassengerrevenueswhenthepointsareissued,whichoccursuponthequalifyingairtravelbeingprovidedtothecustomer.

AsfurtherdiscussedinNote23,AirCanadaacquiredAimiaCanadaInc.,ownerandoperatoroftheAeroplanloyaltybusiness,fromAimiaInc.inJanuary2019.

f) Other revenues

Otherrevenueisprimarilycomprisedofrevenuesfromthesaleofthegroundportionofvacationpackages,groundhandlingservices,on-boardsales,loungepasssalesandloyaltyprogrammarketingfees.Vacationpackagerevenueisrecognizedasservicesareprovidedovertheperiodofthevacation.Otherairlinerelatedservicerevenuesarerecognizedastheproductsaresoldtopassengersortheservicesareprovided.

IncertainsubleasesofaircrafttoJazz,foraccountingpurposes,theCorporationactsasanagentandaccordinglyreportsthesubleaserevenuesnetagainstaircraftrentexpenseasthetermsofthesubleasematchthetermsoftheCorporation’slease.TheCorporationactsaslesseeandsublessorinthesematters.

g) Employee benefits

Thecostofpensions,otherpost-retirementandpost-employmentbenefitsearnedbyemployeesisactuariallydeterminedannuallyasatDecember31.Thecostisdeterminedusingtheprojectedunitcreditmethodandassumptionsincludingmarketinterestrates,salaryescalation,retirementagesofemployees,mortalityrates,andhealthcarecosts.

Pastservicecostsarerecognizedintheperiodofaplanamendment,irrespectiveofwhetherthebenefitshavevested.Gainsandlossesoncurtailmentsorsettlementsarerecognizedintheperiodinwhichthecurtailmentorsettlementoccurs.

Thecurrentservicecostandanypastservicecost,gainsandlossesoncurtailmentsorsettlementsarerecordedinWages,salariesandbenefits.TheinterestarisingonthenetbenefitobligationsarepresentedinNetfinancingexpenserelatingtoemployeebenefits.Netactuarialgainsandlosses,referredtoasremeasurements,arerecognizedinOthercomprehensiveincomeandRetainedearningswithoutsubsequentreclassificationtoincome.

Thecurrentservicecostisestimatedutilizingdifferentdiscountratesderivedfromtheyieldcurveusedtomeasurethedefinedbenefitobligationatthebeginningoftheyear,reflectingthedifferenttimingofbenefitpaymentsforpastservice(thedefinedbenefitobligation)andfutureservice(thecurrentservicecost).

Theliabilityinrespectofminimumfundingrequirements,ifany,isdeterminedusingtheprojectedminimumfundingrequirements,basedonmanagement’sbestestimatesoftheactuariallydeterminedfundedstatusoftheplan,marketdiscountratesandsalaryescalationestimates.TheliabilityinrespectoftheminimumfundingrequirementandanysubsequentremeasurementofthatliabilityarerecognizedimmediatelyinOthercomprehensiveincomeandRetainedearningswithoutsubsequentreclassificationtoincome.

Recognizedpensionassetsarelimitedtothepresentvalueofanyreductionsinfuturecontributionsoranyfuturerefunds.

h) Employee profit sharing plans

TheCorporationhasemployeeprofitsharingplans.PaymentsarecalculatedbasedonfullcalendaryearresultsandanexpenserecordedthroughouttheyearasachargetoWages,salariesandbenefitsbasedontheestimatedannualpaymentsundertheplans.

i) Share-based compensation plans

CertainemployeesoftheCorporationparticipateinAirCanada’sLong-TermIncentivePlan,whichprovidesforthegrantofstockoptions,performanceshareunits(“PSUs”)andrestrictedshareunits(“RSUs”),asfurtherdescribedinNote12.PSUsandRSUsarenotionalshareunitswhichareexchangeable,onaone-to-onebasis,asdeterminedbytheBoardofDirectorsasdescribedinNote12,forAirCanadashares,orthecashequivalent.

Optionsareexpensedusingagradedvestingmodeloverthevestingperiod.TheCorporationrecognizescompensationexpenseandacorrespondingadjustmenttoContributedsurplusequaltothefairvalueoftheequityinstrumentsgrantedusingtheBlack-Scholesoptionpricingmodeltakingintoconsiderationforfeitureestimates.Compensationexpenseisadjustedforsubsequentchangesinmanagement’sestimateofthenumberofoptionsthatareexpectedtovest.

AprospectivechangeinaccountingforPSUsandRSUswasmadein2017fromequitysettledinstrumentstocashsettledinstrumentsbasedonsettlementexperience.Inaccountingforcashsettledinstruments,compensationexpenseisadjustedforsubsequentchangesinthefairvalueofthePSUsandRSUstakingintoaccountforfeitureestimates.TheliabilityrelatedtocashsettledPSUsandRSUsisrecordedinOtherlong-term

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liabilities.RefertoNote15foradescriptionofderivativeinstrumentsusedbytheCorporationtoeconomicallyhedgethecashflowexposuretoPSUsandRSUs.

AirCanadaalsomaintainsanemployeesharepurchaseplan.Underthisplan,contributionsbytheCorporation’semployeesarematchedtoaspecificpercentagebytheCorporation.EmployeesmustremainwiththeCorporationandretaintheirsharesuntilMarch31ofthesubsequentyearforvestingoftheCorporation’scontributions.ThesecontributionsareexpensedinWages,salaries,andbenefitsexpenseoverthevestingperiod.

j) Maintenance and repairs

MaintenanceandrepaircostsforbothleasedandownedaircraftarechargedtoAircraftmaintenanceasincurred,withtheexceptionofmaintenanceandrepaircostsrelatedtoreturnconditionsonaircraftunderoperatinglease,whichareaccruedoverthetermofthelease,andmajormaintenanceexpendituresonownedandfinanceleasedaircraft,whicharecapitalizedasdescribedbelowinNote2r.

MaintenanceandrepaircostsrelatedtoreturnconditionsonaircraftleasesarerecordedoverthetermoftheleasefortheendofleasemaintenancereturnconditionobligationswithintheCorporation’soperatingleases,offsetbyaprepaidmaintenanceassettotheextentofanyrelatedpower-by-the-hourmaintenanceserviceagreementsoranyrecoveriesunderaircraftsubleasingarrangements.TheprovisionisrecordedwithinMaintenanceprovisionsusingadiscountratetakingintoaccountthespecificrisksoftheliabilityovertheremainingtermofthelease.InterestaccretionontheprovisionisrecordedinOthernon-operatingexpense.Anychangesinthemaintenancecostestimate,discountrates,timingofsettlementordifferenceintheactualmaintenancecostincurredandtheamountoftheprovisionarerecordedinAircraftmaintenance.

k) Other operating expenses

IncludedinOtheroperatingexpensesareexpensesrelatedtobuildingrentandmaintenance,airportterminalhandlingcosts,professionalfeesandservices,crewmealsandhotels,advertisingandpromotion,insurancecosts,andotherexpenses.Otheroperatingexpensesarerecognizedasincurred.

l) Financial instruments

Recognition

Financialassetsandfinancialliabilities,includingderivatives,arerecognizedontheconsolidatedstatementoffinancialpositionwhentheCorporationbecomesapartytothefinancialinstrumentorderivativecontract.

Classification

TheCorporationclassifiesitsfinancialassetsandfinancialliabilitiesinthefollowingmeasurementcategoriesi)thosetobemeasuredsubsequentlyatfairvalue(eitherthroughothercomprehensiveincomeorthroughprofitorloss)andii)thosetobemeasuredatamortizedcost.Theclassificationoffinancialassetsdependsonthebusinessmodelformanagingthefinancialassetsandthecontractualtermsofthecashflows.Financialliabilitiesareclassifiedasthosetobemeasuredatamortizedcostunlesstheyaredesignatedasthosetobemeasuredsubsequentlyatfairvaluethroughprofitorloss(irrevocableelectionatthetimeofrecognition).Forassetsandliabilitiesmeasuredatfairvalue,gainsandlossesareeitherrecordedinprofitorlossorothercomprehensiveincome.

TheCorporationreclassifiesfinancialassetswhenandonlywhenitsbusinessmodelformanagingthoseassetschanges.Financialliabilitiesarenotreclassified.

TheCorporationhasimplementedthefollowingclassifications:

> Cashandcashequivalents,Short-terminvestments,andRestrictedcashareclassifiedasassetsatfairvaluethroughprofitandlossandanyperiodchangeinfairvalueisrecordedthroughInterestincomeintheconsolidatedstatementofoperations,asapplicable.

> AccountsreceivableandAircraft-relatedandotherdepositsareclassifiedasassetsatamortizedcostandaremeasuredusingtheeffectiveinterestratemethod.Interestincomeisrecordedintheconsolidatedstatementofoperations,asapplicable.

> Accountspayable,creditfacilities,andlong-termdebtareclassifiedasotherfinancialliabilitiesandaremeasuredatamortizedcostusingtheeffectiveinterestratemethod.Interestexpenseisrecordedintheconsolidatedstatementofoperations,asapplicable.

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Measurement

Allfinancialinstrumentsarerequiredtobemeasuredatfairvalueoninitialrecognition,plus,inthecaseofafinancialassetorfinancialliabilitynotatfairvaluethroughprofitorloss,transactioncoststhataredirectlyattributabletotheacquisitionorissueofthefinancialassetorfinancialliability.Transactioncostsoffinancialassetsandfinancialliabilitiescarriedatfairvaluethroughprofitorlossareexpensedinprofitorloss.Financialassetswithembeddedderivativesareconsideredintheirentiretywhendeterminingwhethertheircashflowsaresolelypaymentofprincipalandinterest.

Financialassetsthatareheldwithinabusinessmodelwhoseobjectiveistocollectthecontractualcashflows,andthathavecontractualcashflowsthataresolelypaymentsofprincipalandinterestontheprincipaloutstandingaregenerallymeasuredatamortizedcostattheendofthesubsequentaccountingperiods.Allotherfinancialassetsincludingequityinvestmentsaremeasuredattheirfairvaluesattheendofsubsequentaccountingperiods,withanychangestakenthroughprofitandlossorothercomprehensiveincome(irrevocableelectionatthetimeofrecognition).

Impairment

TheCorporationassessesallinformationavailable,including,onaforward-lookingbasis,theexpectedcreditlossesassociatedwithitsassetscarriedatamortizedcost.Theimpairmentmethodologyapplieddependsonwhethertherehasbeenasignificantincreaseincreditrisk.Toassesswhetherthereisasignificantincreaseincreditrisk,theCorporationcomparestheriskofadefaultoccurringontheassetasatthereportingdatewiththeriskofdefaultasatthedateofinitialrecognitionbasedonallinformationavailable,andreasonableandsupportiveforward-lookinginformation.Fortradereceivablesonly,theCorporationappliesthesimplifiedapproachaspermittedbyIFRS9whichrequiresexpectedlifetimelossestoberecognizedfrominitialrecognitionofreceivables.

DerivativesandHedgeAccounting

Derivativesareinitiallyrecognizedatfairvalueonthedateaderivativecontractisenteredintoandaresubsequentlyre-measuredtotheirfairvalueattheendofeachreportingperiod.Theaccountingforsubsequentchangesinfairvaluedependsonwhetherthederivativeisdesignatedasahedginginstrument,andifso,thenatureoftheitembeinghedgedandthetypeofhedgerelationshipdesignated.TheCorporationdocumentsattheinceptionofthehedgingtransactiontheeconomicrelationshipbetweenhedginginstrumentsandhedgeditemsincludingwhetherthehedginginstrumentisexpectedtooffsetchangesincashflowsofhedgeditems.TheCorporationdocumentsitsriskmanagementobjectiveandstrategyforundertakingvarious

hedgetransactionsattheinceptionofeachhedgingrelationship.

TheCorporationapplieshedgeaccountingfordesignatedfuelderivatives.Crudeoilprices,whilenotcontractuallyspecifiedintheCorporation’sjetfuelpurchasecontracts,areeconomicallyrelatedtojetfuelprices.TheCorporationentersintooptioncontractsoncrudeoilanddesignatesthecontractsincashflowhedgesofthecrudeoilcomponentofitsfuturejetfuelpurchases.TheCorporationhasestablishedahedgeratioof1:1foritshedgingrelationships.Underhedgeaccounting,totheextenteffective,thegainorlossonfuelhedgingderivativesisrecordedinothercomprehensiveincome.Premiumspaidforoptioncontractsandthetimevalueoftheoptioncontractsaredeferredasacostofthehedgeinothercomprehensiveincome.AmountsaccumulatedinothercomprehensiveincomearepresentedashedgingreserveinequityandarereclassifiedtoAircraftfuelexpensewhentheunderlyinghedgedjetfuelisused.Anyineffectivegainorlossonfuelhedgingderivativesisrecordedinnon-operatingexpenseinGainonfinancialinstrumentsrecordedatfairvalue.RefertoNote15fortheresultsfromfuelhedgeaccounting.

Whenahedginginstrumentexpires,issoldorterminated,orwhenahedgenolongermeetsthecriteriaforhedgeaccounting,anycumulativedeferredgainorlossanddeferredcostsofhedginginequityatthattimeremainsinequityuntiltheforecasttransactionoccurs.Whentheforecasttransactionisnolongerexpectedtooccur,thecumulativegainorlossanddeferredcostsofhedgingthatwerereportedinequityareimmediatelyreclassifiedtoprofitorloss.

Ifthehedgeratioforriskmanagementpurposesisnolongeroptimalbuttheriskmanagementobjectiveremainsunchangedandthehedgecontinuestoqualifyforhedgeaccounting,thehedgerelationshipwillberebalancedbyadjustingeitherthevolumeofthehedgedinstrumentorthevolumeofthehedgeditemsothatthehedgeratioalignswiththeratiousedforriskmanagementpurposes.Anyhedgeineffectivenessiscalculatedandaccountedforinprofitorlossatthetimeofthehedgerelationshiprebalancing.

TheCorporationentersintoforeigncurrency,fuelderivativesandshareforwardcontractstomanagetheassociatedrisks.Derivativeinstrumentsarerecordedontheconsolidatedstatementoffinancialpositionatfairvalue,includingthosederivativesthatareembeddedinfinancialornon-financialcontractsthatarerequiredtobeaccountedforseparately.ChangesinthefairvalueofderivativeinstrumentsarerecognizedinNon-operatingincome(expense),exceptforeffectivechangesfordesignatedfuelderivativesunderhedgeaccountingasdescribedabove.DerivativecontractsareincludedintheconsolidatedstatementoffinancialpositionatfairvalueinPrepaidexpensesandothercurrentassets,Depositsandotherassets,andAccountspayableandaccruedliabilitiesbasedonthetermsofthecontractual

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agreements.Allcashflowsassociatedwithpurchasingandsellingderivativesareclassifiedasoperatingcashflowsintheconsolidatedstatementofcashflow.

m) Foreign currency translation

ThefunctionalcurrencyofAirCanadaanditssubsidiariesistheCanadiandollar.MonetaryassetsandliabilitiesdenominatedinforeigncurrenciesaretranslatedintoCanadiandollarsatratesofexchangeineffectatthedateoftheconsolidatedstatementoffinancialposition.Non-monetaryassetsandliabilities,revenuesandexpensesarisingfromtransactionsdenominatedinforeigncurrencies,aretranslatedatthehistoricalexchangerateortheaverageexchangerateduringtheperiod,asapplicable.AdjustmentstotheCanadiandollarequivalentofforeigndenominatedmonetaryassetsandliabilitiesduetotheimpactofexchangeratechangesarerecognizedinForeignexchangegain(loss).

n) Income taxes

Thetaxexpensefortheperiodcomprisescurrentanddeferredincometax.Taxexpenseisrecognizedintheconsolidatedstatementofoperations,excepttotheextentthatitrelatestoitemsrecognizedinothercomprehensiveincomeordirectlyinequity,inwhichcasethetaxisnettedwithsuchitems.

ThecurrentincometaxexpenseiscalculatedonthebasisofthetaxlawsenactedorsubstantivelyenactedatthebalancesheetdateinthejurisdictionswheretheCorporationanditssubsidiariesoperateandgeneratetaxableincome.Managementperiodicallyevaluatespositionstakenintaxreturnswithrespecttosituationsinwhichapplicabletaxregulationsaresubjecttointerpretation.Itestablishesprovisionswhereappropriateonthebasisofamountsexpectedtobepaidtothetaxauthorities.

Deferredincometaxisrecognized,usingtheliabilitymethod,ontemporarydifferencesarisingbetweenthetaxbasesofassetsandliabilitiesandtheircarryingamountsintheconsolidatedfinancialstatements.Deferredincometaxisdeterminedusingtaxratesandlawsthathavebeenenactedorsubstantivelyenactedbythebalancesheetdateandareexpectedtoapplywhentherelateddeferredincometaxassetisrealizedorthedeferredincometaxliabilityissettled.

Deferredincometaxassetsarerecognizedonlytotheextentthatitisprobablethatfuturetaxableprofitwillbeavailableagainstwhichthetemporarydifferencescanbeutilized.

o) Earnings per share

Basicearningspershare(“EPS”)iscalculatedbydividingthenetincomefortheperiodattributabletotheshareholdersofAirCanadabytheweightedaveragenumberofsharesoutstandingduringtheperiod.

DilutedEPSiscalculatedbyadjustingtheweightedaveragenumberofsharesoutstandingfordilutivepotentialshares.TheCorporation’spotentiallydilutivesharesarecomprisedofstockoptions.Thenumberofsharesincludedwithrespecttotimevestingoptionsiscomputedusingthetreasurystockmethodunlesstheyareanti-dilutive.Underthismethod,theproceedsfromtheexerciseofsuchinstrumentsareassumedtobeusedtopurchasesharesattheaveragemarketpricefortheperiodandthedifferencebetweenthenumberofsharesissueduponexerciseandthenumberofsharesassumedtobepurchasedisincludedinthecalculation.Thenumberofsharesincludedwithrespecttoperformance-basedemployeeshareoptionsistreatedascontingentlyissuablesharesbecausetheirissueiscontingentuponsatisfyingspecifiedconditionsinadditiontothepassageoftime.Ifthespecifiedconditionsaremet,thenthenumberofsharesincludedisalsocomputedusingthetreasurystockmethodunlesstheyareanti-dilutive.

p) Restricted cash

TheCorporationhasrecordedRestrictedcashunderCurrentassetsrepresentingfundsheldintrustbyAirCanadaVacationsinaccordancewithregulatoryrequirementsgoverningadvanceticketsales,aswellasfundsheldinescrowaccountsrelatingtoAirCanadaVacations’creditcardagreementsforcertaintravelrelatedactivities.

RestrictedcashwithmaturitiesgreaterthanoneyearfromthebalancesheetdateisrecordedinDepositsandotherassets.Thisrestrictedcashrelatestofundsondepositwithvariousfinancialinstitutionsascollateralforlettersofcreditandotheritems.

q) Aircraft fuel inventory and spare parts and supplies inventory

Inventoriesofaircraftfuel,sparepartsandsuppliesaremeasuredatcostbeingdeterminedusingaweightedaverageformula,netofrelatedobsolescenceprovision,asapplicable.

TheCorporationdidnotrecognizeanywrite-downsoninventoriesorreversalsofanypreviouswrite-downsduringtheperiodspresented.IncludedinAircraftmaintenanceis$57relatedtosparepartsandsuppliesconsumedduringtheyear(2017–$54).

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r) Property and equipment

Propertyandequipmentisrecognizedusingthecostmodel.Propertyunderfinanceleasesandtherelatedobligationforfutureleasepaymentsareinitiallyrecordedatanamountequaltothelesseroffairvalueofthepropertyorequipmentandthepresentvalueofthoseleasepayments.

TheCorporationallocatestheamountinitiallyrecognizedinrespectofanitemofpropertyandequipmenttoitssignificantcomponentsanddepreciatesseparatelyeachcomponent.Propertyandequipmentaredepreciatedtoestimatedresidualvaluesbasedonthestraight-linemethodovertheirestimatedservicelives.Aircraftandflightequipmentarecomponentizedintoairframe,engine,andcabininteriorequipmentandmodifications.Airframesandenginesaredepreciatedoverperiodsnotexceeding25years,withresidualvaluesinitiallyestimatedat10%oftheoriginalcostandupdatedforchangesinestimatesovertime.Spareenginesandrelatedparts(“rotables”)aredepreciatedovertheaverageremainingusefullifeofthefleettowhichtheyrelatewithresidualvaluesinitiallyestimatedat10%.Cabininteriorequipmentandmodificationsaredepreciatedoverthelesserofeightyearsortheremainingusefullifeoftheaircraft.Cabininteriorequipmentandmodificationstoaircraftonoperatingleasesareamortizedoverthelesserofeightyearsorthetermofthelease.Majormaintenanceofairframesandengines,includingreplacementsparesandparts,labourcostsand/orthird-partymaintenanceservicecosts,arecapitalizedandamortizedovertheaverageexpectedlifebetweenmajormaintenanceevents.Majormaintenanceeventstypicallyconsistofmorecomplexinspectionsandservicingoftheaircraft.Allpower-by-the-hourfleetmaintenancecontractcostsarechargedtooperatingexpensesintheincomestatementasincurred.Buildingsaredepreciatedonastraight-linebasisovertheirusefullivesnotexceeding50yearsorthetermofanyrelatedlease,whicheverisless.Leaseholdimprovementsareamortizedoverthelesseroftheleasetermor5years.Groundandotherequipmentisdepreciatedover3to25years.

Residualvaluesandusefullivesarereviewedatleastannually,anddepreciationratesareadjustedaccordinglyonaprospectivebasis.Gainsandlossesondisposalsofpropertyandequipmentaredeterminedbycomparingtheproceedswiththecarryingamountoftheassetandareincludedaspartofnon-operatinggainsandlossesintheconsolidatedstatementofoperations.

s) Interest capitalized

Borrowingcostsareexpensedasincurred.Forborrowingcostsattributabletotheacquisition,constructionorproductionofanassetthatnecessarilytakesasubstantialperiodoftimetogetreadyforitsintendeduse,thecostsarecapitalizedaspartofthecostofthatasset.Capitalizationofborrowingcostscommenceswhenexpendituresfortheassetandborrowingcostsarebeingincurredandtheactivitiestopreparetheassetforitsintendeduseareinprogress.Borrowingcostsarecapitalizeduptothedatewhentheprojectiscompletedandtherelatedassetisavailableforitsintendeduse.

Totheextentthatfundsareborrowedspecificallyforthepurposeofobtainingsuchassets,theamountofborrowingcostseligibleforcapitalizationisdeterminedattheactualborrowingcostsincurredonthatborrowingduringtheperiodlessanyinvestmentincomeonthetemporaryinvestmentofthoseborrowings.Totheextentthatfundsareborrowedgenerallyandusedforthepurposeofobtainingaqualifyingasset,theamountofborrowingcostseligibleforcapitalizationisdeterminedbyapplyingacapitalizationratetotheexpendituresonthatasset.ThecapitalizationrateistheweightedaverageoftheborrowingcostsapplicabletotheborrowingsoftheCorporationthatareoutstandingduringtheperiod.Borrowingsmadespecificallyforthepurposeofobtainingaqualifyingassetareexcludedfromthiscalculationuntilsubstantiallyalltheactivitiesnecessarytopreparetheassetforitsintendedusearecomplete.

t) Leases

Leasesareclassifiedasfinanceleaseswhentheleasearrangementtransferssubstantiallyalltherisksandrewardsofownershiptothelessee.Allotherleasesareclassifiedasoperatingleases.

Totalaircraftoperatingleaserentalsovertheleasetermareamortizedtooperatingexpense(Aircraftrent)onastraight-linebasis.IncludedinDepositsandotherassetsandOtherlong-termliabilitiesarethedifferencesbetweenthestraight-lineaircraftrentexpenseandthepaymentsasstipulatedundertheleaseagreement.

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u) Intangible assets

Intangibleassetsareinitiallyrecordedatcost.Indefinitelifeintangibleassetsarenotamortizedwhileassetswithfinitelivesareamortizedonastraight-linebasisovertheirestimatedusefullives.

Estimated Useful Life

Remaining amortization period as at

December 31, 2018

Internationalrouterightsandslots

Indefinite notapplicable

Marketingbasedtradenames

Indefinite notapplicable

Technologybased(internallydeveloped)

5-10years 1to10years

AirCanadahasinternationalrouterightsandslotswhichenabletheCorporationtoprovideservicesinternationally.ThevalueoftherecordedintangibleassetsrelatestothecostofrouteandslotrightsatTokyo’sNaritaInternationalAirport,Washington’sReaganNationalAirportandLondon’sHeathrowAirport.AirCanadaexpectstoprovideservicetotheseinternationallocationsforanindefiniteperiod.

AirCanadaandcertainofitssubsidiarieshavetradenames,trademarks,anddomainnames(collectively,“TradeNames”).TheseitemsaremarketingbasedintangibleassetsastheyareprimarilyusedinthesaleandpromotionofAirCanada’sproductsandservices.TheTradeNamescreatebrandrecognitionwithcustomersandpotentialcustomersandarecapableofcontributingtocashflowsforanindefiniteperiodoftime.AirCanadaintendstocontinuallyre-investin,andmarket,theTradeNamestosupportclassificationasindefinitelifeintangibles.IftherewereplanstoceaseusinganyoftheTradeNames,thespecificnameswouldbeclassifiedasfiniteandamortizedovertheexpectedremainingusefullife.

Developmentcoststhataredirectlyattributabletothedesign,developmentandtestingofidentifiablesoftwareproductsarerecognizedastechnologybasedintangibleassetsifcertaincriteriaaremet,includingtechnicalfeasibilityandintentandabilitytodevelopandusethetechnologytogenerateprobablefutureeconomicbenefits;otherwisetheyareexpensedasincurred.Directlyattributablecoststhatarecapitalizedaspartofthetechnologybasedintangibleassetsincludesoftware-related,employeeandthird-partydevelopmentcostsandanappropriateportionofrelevantoverhead.

v) Goodwill

GoodwillrepresentstheexcessofthecostofanacquisitionoverthefairvalueoftheCorporation’sshareofthenetidentifiableassetsoftheacquiredbusinessatthedateofacquisition.Goodwillistestedatleastannuallyforimpairmentandcarriedatcostlessaccumulatedimpairmentlosses.Impairmentlossesongoodwillarenotreversed.Forthepurposeofimpairmenttesting,goodwillistestedforimpairmentatthelowestlevelwithintheentityatwhichthegoodwillismonitoredforinternalmanagementpurposes,beingtheoperatingsegmentlevel(Noteaa).

w) Impairment of long-lived assets

Long-livedassetsincludepropertyandequipment,finitelivedintangibleassets,indefinitelivedintangibleassetsandgoodwill.Assetsthathaveanindefiniteusefullife,includinggoodwillaretestedatleastannuallyforimpairmentorwheneventsorcircumstancesindicatethatthecarryingvaluemaynotberecoverable.Assetsthataresubjecttodepreciationoramortizationarereviewedforimpairmentwhenevereventsorchangesincircumstancesindicatethatthecarryingamountmaynotberecoverable.Animpairmenttestisperformedbycomparingthecarryingamountoftheassetorgroupofassetstotheirrecoverableamount.Recoverableamountiscalculatedasthehigherofanasset’sorcash-generatingunit’sfairvaluelesscoststodisposeanditsvalueinuse.Forthepurposeofassessingimpairment,assetsaregroupedatthelowestlevelsforwhichthereareseparatelyidentifiablecashinflows(cash-generatingunitsorCGUs).Managementhasdeterminedthattheappropriatelevelforassessingimpairmentsisatthenarrow-bodyandwide-bodyfleetlevelsforaircraftandrelatedassetssupportingtheoperatingfleet.Parkedaircraftnotusedinoperationsandaircraftleasedorsubleasedtothirdpartiesareassessedforimpairmentattheindividualassetlevel.Animpairmentlossisrecognizedfortheamountbywhichtheasset’sorcash-generatingunit’scarryingamountexceedsitsrecoverableamount.

Long-livedassets,otherthangoodwill,thatsufferedanimpairmentarereviewedforpossiblereversaloftheimpairmentateachreportingdate.Managementassesseswhetherthereisanyindicationthatanimpairmentlossrecognizedinapriorperiodnolongerexistsorhasdecreased.Inassessingwhetherthereisapossiblereversalofanimpairmentloss,managementconsiderstheindicatorsthatgaverisetotheimpairmentloss.Ifanysuchindicatorsexistthatanimpairmentlosshasreversed,managementestimatestherecoverableamountofthelong-livedasset.Animpairmentlossrecognizedinpriorperiodsforanassetotherthangoodwillshallbereversedonlyiftherehasbeenachangeintheestimatesusedtodeterminetheasset’srecoverableamountsincethelastimpairmentlosswasrecognized.Thecarryingamountofanyindividualasset

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intheCGUisnotincreasedabovethecarryingvaluethatwouldhavebeendeterminedhadtheoriginalimpairmentnotoccurred.Areversalofanimpairmentlossisrecognizedimmediatelyintheconsolidatedstatementofoperations.

x) Non-current assets (or disposal groups) held for sale

Non-currentassets(ordisposalgroups)areclassifiedasassetsheldforsalewhentheircarryingamountistoberecoveredprincipallythroughasaletransaction,suchassetsareavailableforimmediatesaleinpresentcondition,andasaleisconsideredhighlyprobable.Theyarestatedatthelowerofcarryingamountandfairvaluelesscoststodispose.

y) Provisions

Provisionsarerecognizedwhenthereexistsapresentlegalorconstructiveobligationasaresultofpastevents,itisprobablethatanoutflowofresourceswillberequiredtosettletheobligation,andareliableestimatecanbemadeoftheobligation.Iftheeffectissignificant,theexpectedcashflowsarediscountedusingaratethatreflects,whereappropriate,therisksspecifictotheliability.Wherediscountingisused,interestaccretionontheprovisionisrecordedinOthernon-operatingexpense.

z) Special items

Specialitemsarethoseitemsthatinmanagement’sviewaretobeseparatelydisclosedbyvirtueoftheirsizeorincidencetoenableafullunderstandingoftheCorporation’sfinancialperformance.

aa) Segment reporting

AirCanadaismanagedasoneoperatingsegmentbasedonhowfinancialinformationisproducedinternallyforthepurposesofmakingoperatingdecisions.Theoperatingsegmentisreportedinamannerconsistentwiththeinternalreportingprovidedtothechiefoperatingdecisionmaker.Thechiefoperatingdecisionmaker,whoisresponsibleforallocatingresourcesandassessingperformanceofoperations,hasbeenidentifiedastheChiefExecutiveOfficer.

bb) Accounting standards adopted on January 1, 2018

IFRS15–RevenuefromContractswithCustomers

IFRS15replacesIAS18Revenueandrelatedinterpretations.Thecoreprincipleofthenewstandardistorecognizerevenuetodepictthetransferofgoodsorservicestocustomersinamountsthatreflecttheconsiderationtowhichtheentityexpectstobeentitledinexchangeforthosegoodsorservices.Thenewstandardisintendedtoenhancedisclosuresaboutrevenue,providemorecomprehensiveguidancefortransactionsthatwerenotpreviouslyaddressedandimproveguidanceformultiple-elementarrangements.IFRS15iseffectiveforannualperiodsbeginningonJanuary1,2018.

TheCorporationadoptedthestandardeffectiveJanuary1,2018usingthefullretrospectivemethod,whichrequireseachpriorreportingperiodpresentedtoberestated.Themainchangesareexplainedbelow.

Accounting for costs to obtain a contractUnderIFRS15,incrementalcostsofobtainingpassengerrevenues,suchascreditcardfeesandglobaldistributionsystemcharges,arecapitalizedattimeofsaleandexpensedatthetimeofpassengerrevenuerecognition.PriortoadoptionofIFRS15,thesecostswereexpensedasincurredatthetimetheflightticketwassold.Withthischangeinaccountingpolicyforcontractcosts,thetimingofexpenserecognitionisimpacted.

TheimpactontheconsolidatedstatementoffinancialpositionasatJanuary1,2017isanincreasetoPrepaidexpensesandothercurrentassetsof$58andanequivalentincreasetoopeningRetainedearnings($65asatDecember31,2017).Inaddition,deferredcommissioncostsintheamountof$40asatJanuary1,2017,previouslyrecordednetagainsttheAdvanceticketsalesliability,werereclassifiedtoPrepaidexpensesandothercurrentassets($35asatDecember31,2017).

Accounting for change feesRevenuearisingfromchangefeeswhicharecollectedbytravelagentsonAirCanada’sbehalfaredeferredandrecognizedinpassengerrevenueatthetimeoftherelatedflight,ratherthanattimeofcollection.TheimpactontheconsolidatedstatementoffinancialpositionasatJanuary1,2017isanincreasetoAdvanceticketsalesof$6andanequivalentdecreasetoopeningRetainedearnings($6asatDecember31,2017).


2018 ANNUAL REPORT

PresentationCertainpassengerandcargorelatedfeesandsurchargeswerereclassifiedfromOthertoPassengerrevenueandtoCargorevenueontheconsolidatedstatementofoperationstobetterreflectthenatureandaggregationofsimilarrevenueitems.Thisreclassificationhasnoimpactontotaloperatingrevenues.

Impact to previously reported resultsSelectedadjustedfinancialstatementinformation,whichreflecttheadoptionofIFRS15,ispresentedbelow.Lineitemsthatwerenotaffectedbythechangeinaccountingpolicyhavenotbeenincluded.Asaresult,thesub-totalsandtotalsdisclosedcannotberecalculatedfromthenumbersprovided.Insummary,thefollowingadjustmentsweremadetotheamountsrecognizedintheconsolidatedstatementoffinancialpositionforthedateofinitialapplicationonJanuary1,2017andattheendofthecomparativeperiod,December31,2017.


December31,2016aspreviously

reported

Reclassification Remeasurements January1,2017asrestated

Prepaidexpensesandothercurrentassets $ 349 $ 40 $ 58 $ 447Total assets $ 15,114 $ 40 $ 58 $ 15,212Advanceticketsales 2,073 40 6 2,119Total current liabilities $ 4,424 $ 40 $ 6 $ 4,470Retainedearnings 336 - 52 388Total shareholders’ equity $ 1,219 $ - $ 52 $ 1,271Total liabilities and shareholders’ equity $ 15,114 $ 40 $ 58 $ 15,212



reported

Reclassification Remeasurements December31,2017asrestated

Prepaidexpensesandothercurrentassets $ 325 $ 35 $ 65 $ 425Deferredincometax 472 - (16) 456Total assets $ 17,698 $ 35 $ 49 $ 17,782Advanceticketsales 2,428 35 6 2,469Total current liabilities $ 5,060 $ 35 $ 6 $ 5,101Retainedearnings 2,511 - 43 2,554Total shareholders’ equity $ 3,379 $ - $ 43 $ 3,422Total liabilities and shareholders’ equity $ 17,698 $ 35 $ 49 $ 17,782

NodeferredincometaxwasrecordedontherestatementasofJanuary1,2017duetodeferredincometaxassetsnotbeingrecognizedatthattime.Startinginthethirdquarterof2017,theadjustmentsincludetheircorrespondingincometaxeffectresultingina$16decreaseofthetaxrecoverypreviouslyrecordedintheconsolidatedstatementofoperations.

2018 ANNUAL REPORT


AdoptionofthestandardimpactedtheCorporation’spreviouslyreportedconsolidatedstatementofoperationsasfollows.


YearendedDecember31,

2017aspreviouslyreported

Reclassification Remeasurements YearendedDecember31,2017

asrestated

Operating revenues

Passenger $ 14,471 $ 122 $ - $ 14,593Cargo 650 58 - 708Other 1,131 (180) - 951Total revenues 16,252 - - 16,252

Operating expenses

Salesanddistributioncosts 777 - (7) 770Total operating expenses 14,888 - (7) 14,881Operating income 1,364 - 7 1,371Incometax(expense)recovery 759 - (16) 743Net income $ 2,038 $ - $ (9) $ 2,029Basicearningspershare $ 7.48 $ - $ (0.04) $ 7.44Dilutedearningspershare $ 7.34 $ - $ (0.03) $ 7.31

AdoptionofIFRS15didnothaveanynetimpactontheconsolidatedstatementofcashflows.

cc) Accounting standards and amendments issued but not yet adopted

ThefollowingisanoverviewofaccountingstandardchangesthattheCorporationwillberequiredtoadoptinfutureyears.TheCorporationcontinuestoevaluatetheimpactofthesestandardsonitsconsolidatedfinancialstatements.

IFRS16–Leases

IFRS16replacesIAS17Leasesandrelatedinterpretations.Thecoreprincipleisthatalesseerecognizesassetsandliabilitiesforallleaseswithaleasetermofmorethan12months.Alesseeisrequiredtorecognizearight-of-useassetrepresentingitsrighttousetheunderlyingleasedassetandaleaseliabilityrepresentingitsobligationtomakeleasepayments.Assetsandliabilitiesarisingfromaleaseareinitiallymeasuredonapresentvaluebasis.Themeasurementoftheleaseliabilityincludesnon-cancellableleasepayments(includinginflation-linkedpayments),andalsoincludespaymentstobemadeinoptionalperiodsifthelesseeisreasonablycertaintoexerciseanoptiontoextendthelease,ornottoexerciseanoptiontoterminatethelease.Purchaseoptionswhicharereasonablycertainofbeingexercisedarealsoincludedinthemeasurementoftheleaseliability.Leasepaymentswillnotincludevariableleasepaymentsotherthanthosethatdependonanindexorrate.Theright-of-useassetwillbederivedfromthecalculationoftheleaseliabilityandwillalsoincludeanyprovisionsthelesseewilloweforreturnconditionsonleasedassets.

Thenewstandardisintendedtoprovideanimprovedrepresentationofleasingtransactions,inparticularthosethatdonotcurrentlyrequirethelesseetorecognizeanassetandliabilityarisingfromanoperatinglease.IFRS16iseffectiveforannualperiodsbeginningonJanuary1,2019.EntitieshavetheoptionofadoptingafullretrospectiveapproachoramodifiedretrospectiveapproachontransitiontoIFRS16.

TheCorporationwillapplythestandardeffectiveJanuary1,2019andwilltransitionwithafullretrospectiveapproachwithrestatementtoeachpriorreportingperiodpresented.TheCorporationhaselectedthepackageofpracticalexpedientstonotreassesspriorconclusionsrelatedtocontractscontainingleasesandtoapplytherecognitionexemptionforshorttermleasesandcontractsforwhichtheunderlyingassethasalowvalue.

ThisstandardwillhaveasignificantimpactontheCorporation’sconsolidatedbalancesheet,alongwithachangetotherecognition,measurementandpresentationofleaseexpensesintheconsolidatedstatementofoperations.

2018 ANNUAL REPORT


Aircraft LeasesAsofDecember31,2018theCorporationhad126aircraftunderoperatingleases(111aircraftasatDecember31,2017),andAirCanadawillrecordsuchaircraftasright-of-useassetsandleaseliabilitiesofAirCanadainaccordancewiththerequirementsofthenewstandard.Additionally,theCorporationhasidentifiedthat,underIFRS16,AirCanadaisthelesseeinrespectofaircraftusedbyregionalcarriersprovidingservicesundertherespectivecapacitypurchaseagreements(“CPA”),andwillrecordsuchaircraftasright-of-useassetsandleaseliabilitiesofAirCanada.AsatDecember31,2018,therewere132aircraft(134aircraftasatDecember31,2017)operatingunderthesearrangementsonbehalfofAirCanada.

Property LeasesTheCorporationhasleasesrelatedtoairportterminaloperationsspaceandotherrealestateleases.Forleasesrelatedtoterminaloperationsspace,therearegenerallyeffectivesubstitutionrightsinthehandsofthelessorandthereforethesearenotconsideredleasecontractsunderthestandard.Leaseswithreciprocalterminationrightswithanoticeperiodoflessthan12monthswouldbeconsideredshort-termleasesandthereforewouldbeexcludedfrombalancesheetrecognitionunderthepracticalexpedient.Finally,thoseairportterminalcontractswithvariableleasepaymentswillalsobeexcludedsincevariableleasepayments,otherthanthosebasedonanindexorrate,areexcludedfromthemeasurementoftheleaseliability.Thisresultsinaportfolioofpropertyleasesthatareexpectedtoberecordedasright-of-useassetsandleaseliabilitiesunderthestandardwhichrelatetodedicatedspaceinAirCanada’shublocationsofToronto,MontrealandVancouver,leasecontractsonbuildingspacededicatedtoAirCanadaforoffices,airportandmaintenanceoperations,MapleLeafLoungesandlandleases.

Accounting for Leases and Right-of-Use AssetsLeasesarerecognizedasaright-of-useassetandcorrespondingliabilityatthedateofwhichtheleasedassetisavailableforusebytheCorporation.Eachleasepaymentisallocatedbetweentheliabilityandinterestexpense.Theinterestcostischargedtotheconsolidatedstatementofoperationsovertheleaseperiodtoproduceaconstantperiodicrateofinterestontheremainingbalanceoftheliabilityforeachperiod.

Right-of-useassetswillbeaccountedforunderIAS16Property,PlantandEquipment.Aircraftrecordedasright-of-useassetswillhavethesameaccountingpoliciesasdirectlyownedaircraft,meaningtheright-of-useassetswillbecomponentizedanddepreciatedovertheleaseterm.Consistentwithownedaircraft,anyqualifyingmaintenanceeventswillbecapitalized

anddepreciatedoverthelesseroftheleasetermandexpectedmaintenancelife.

Maintenanceprovisionsforend-of-leasereturnobligationswillberecorded,asapplicable,onaircraftleasesasamaintenanceexpenseoverthetermofthelease.Anychangestotheprovisionforend-of-leaseconditionswillberecognizedasanadjustmenttotheright-of-useassetandsubsequentlyamortizedtotheincomestatementovertheremainingtermofthelease.

TheapplicationofIFRS16requiresassumptionsandestimatesinordertodeterminethevalueoftheright-of-useassetsandtheleaseliabilitieswhichmainlyrelatetotheimplicitinterestrateforaircraftleasesandtheincrementalborrowingrateatcommencementdateofthecontractforpropertyleases.Judgementmustalsobeappliedastowhetherrenewaloptionsarereasonablycertainofbeingexercised.

Income Statement ImpactsTheimpactsontheincomestatementwillbeaneliminationofaircraftrentandbuildingrent,whichisrecordedinotheroperatingexpenses,forthosecontractswhicharerecognizedasleases,andinsteadwillbereplacedbyanamortizationoftheright-of-useassetandinterestcostsontheleaseliability.Maintenanceexpenseisexpectedtodecreaseunderthestandardasqualifyingmaintenanceeventsfortheformeroperatingleaseswillbecapitalizedaspartoftheright-of-useassetanddepreciatedovertheirexpectedmaintenancelife.Thiswillbepartiallyoffsetbyhighermaintenanceprovisionexpenserecordedonallaircraftright-of-useassetswhichcontainendofleasemaintenancereturnconditions.RegionalairlinesexpenseisexpectedtodecreasetotheextentaircraftrentisremovedandrecordedindepreciationandinterestexpenseoutsideoftheRegionalsairlinesexpense.

SincealltheaircraftleasecontractsaredenominatedinUSdollars,theremaybeadditionalvolatilityintheforeignexchangerecognizedintheincomestatementduetotherevaluationoftheleaseliabilitiesandmaintenanceprovisionstotherateofexchangeineffectatthedateofthebalancesheet.

Anticipated impact to 2018 resultsSelectadjustedfinancialstatementinformation,whichreflectstheanticipatedimpactofadoptionofIFRS16onJanuary1,2018,ispresentedbelow.Lineitemsthatarenotexpectedtobeaffectedbythechangeinaccountingpolicyhavenotbeenincluded.Asaresult,thesub-totalsandtotalsdisclosedcannotberecalculatedfromthenumbersprovided.Insummary,thefollowingadjustmentsareanticipatedtobemadetotheamountsrecognizedintheconsolidatedstatementoffinancialpositionforthedateofinitialapplicationonJanuary1,2018.


2018 ANNUAL REPORT



reported

AirCanadaaircraft Regionalaircraft

Propertyleases

Expected January 1, 2018

as restated

Accountsreceivable $ 814 $ (3) $ - $ - $ 811Depositsandotherassets 465 (63) - - 402Propertyandequipment 9,252 1,649 766 160 11,827Deferredincometax 456 71 144 13 684Total assets $ 17,782 $ 1,654 $ 910 $ 173 $ 20,519

Accountspayableandaccruedliabilities

1,961 (22) (12) - 1,927

Currentportionoflong-termdebtandleaseliabilities

671 357 146 12 1,186

Totalcurrentliabilities 5,101 335 134 12 5,582

Long-termdebtandleaseliabilities

5,448 1,452 1,092 198 8,190

Maintenanceprovisions 1,003 70 78 - 1,151Otherlong-termliabilities 167 (8) - - 159Total liabilities $ 14,360 $ 1,849 $ 1,304 $ 210 $ 17,723Retainedearnings 2,554 (195) (394) (37) 1,928Total shareholders’ equity $ 3,422 $ (195) $ (394) $ (37) $ 2,796

Total liabilities and shareholders’ equity

$ 17,782 $ 1,654 $ 910 $ 173 $ 20,519

2018 ANNUAL REPORT


3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

ThepreparationoffinancialstatementsinconformitywithGAAPrequiresmanagementtomakeestimatesandassumptionsthataffecttheamountsreportedinthesefinancialstatementsandaccompanyingnotes.Theseestimatesandassociatedassumptionsarebasedonhistoricalexperience,futureoperatingplansandvariousotherfactorsbelievedtobereasonableunderthecircumstances,andtheresultsofsuchestimatesformthebasisofJudgementsaboutcarryingvaluesofassetsandliabilities.Theseunderlyingassumptionsarereviewedonanongoingbasis.Actualresultscoulddiffermateriallyfromthoseestimates.

Significantestimatesandjudgementsmadeinthepreparationofthesefinancialstatementsinclude,butarenotlimitedto,thefollowingareas,withfurtherinformationcontainedintheapplicableaccountingpolicyornote:

> Employeefuturebenefits

− ThecostandrelatedliabilitiesoftheCorporation’spensions,otherpost-retirementandpost-employmentbenefitprogramsaredeterminedusingactuarialvaluations.Theactuarialvaluationsinvolveassumptionsandestimatesincludingdiscountrates,futuresalaryincreases,mortalityratesandfuturebenefitincreases.Also,duetothelong-termnatureoftheseprograms,suchestimatesaresubjecttosignificantuncertainty.RefertoNote8foradditionalinformation.

> Depreciationandamortizationperiodforlong-livedassets

− TheCorporationmakesestimatesabouttheexpectedusefullivesoflong-livedassetsandtheexpectedresidualvalueoftheassetsbasedontheestimatedcurrentandfuturefairvaluesoftheassets,theCorporation’sfleetplansandthecashflowstheygenerate.Changestotheseestimates,whichcanbesignificant,couldbecausedbyavarietyoffactors,includingchangestomaintenanceprograms,changesinjetfuelpricesandotheroperatingcosts,changesinutilizationoftheaircraft,andchangingmarketpricesfornewandusedaircraftofthesameorsimilartypes.Estimatesandassumptionsareevaluatedatleastannually.Generally,theseadjustmentsareaccountedforonaprospectivebasis,throughdepreciationandamortizationexpense.Forthepurposesofsensitivityanalysisontheseestimates,a50%reductiontoresidualvaluesonaircraftwithremainingusefullivesgreaterthanfiveyearsresultsinanincreaseof$14toannualdepreciationexpense.Foraircraftwithshorterremainingusefullives,theresidualvaluesarenotexpectedtochangesignificantly.

> Impairmentconsiderationsonlong-livedassets

− Whenrequired,animpairmenttestisperformedbycomparingthecarryingamountoftheassetorcash-generatingunittotheirrecoverableamount,whichiscalculatedasthehigherofanasset’sorcash-generatingunit’sfairvaluelesscoststodisposeanditsvalueinuse.Fairvaluelesscoststodisposemaybecalculatedbaseduponadiscountedcashflowanalysis,whichrequiresmanagementtomakeanumberofsignificantmarketparticipantassumptionsincludingassumptionsrelatingtofutureoperatingplans,discountratesandfuturegrowthrates.

> Maintenanceprovisions

− Therecordingofmaintenanceprovisionsrelatedtoreturnconditionsonaircraftleasesrequiresmanagementtomakeestimatesofthefuturecostsassociatedwiththemaintenanceeventsrequiredundertheleasereturnconditionandestimatesoftheexpectedfuturemaintenanceconditionoftheaircraftatthetimeofleaseexpiry.Theseestimatestakeintoaccountcurrentcostsofthesemaintenanceevents,estimatesofinflationsurroundingthesecostsaswellasassumptionssurroundingutilizationoftherelatedaircraft.AnydifferenceintheactualmaintenancecostincurredandtheamountoftheprovisionisrecordedinAircraftmaintenanceexpenseintheperiod.Theeffectofanychangesinestimates,includingchangesindiscountrates,inflationassumptions,costestimatesorleaseexpiries,isalsorecognizedinAircraftmaintenanceexpenseintheperiod.RefertoNote9(a)foradditionalinformation.

2018 ANNUAL REPORT


> Incometaxes

− Incometaxassetsandliabilitiesaremeasuredattheamountthatisexpectedtoberealizedorincurreduponultimatesettlementwithtaxationauthorities.Suchassessmentsarebasedupontheapplicableincometaxlegislation,regulationsandinterpretations,allofwhichmaybesubjecttochangeandinterpretation.Deferredincometaxassetsandliabilitiesarecomposedofthetaxeffectoftemporarydifferencesbetweenthecarryingamountandtaxbasisofassetsandliabilities,aswellastheincometaxeffectofundeductedincometaxlosses.Thetimingofthereversaloftemporarydifferencesisestimatedandtheincometaxratesubstantivelyenactedfortheperiodsofreversalisappliedtothetemporarydifference.Thecarryingamountsofassetsandliabilitiesaresubjecttotheaccountingestimatesthatareinherentinthosebalances.Assumptionsastothetimingofreversaloftemporarydifferencesincludeexpectationsaboutthefutureresultsofoperationsandfuturecashflows.Changesintaxlaws,taxratesorexpectedtimingofreversalmayhaveasignificantimpactontheamountsrecordedfordeferredincometaxassetsandliabilities.RefertoNote10Incometaxesforadditionalinformation.


2018 ANNUAL REPORT

4. PROPERTY AND EQUIPMENT

Aircraft and flight equipment

Buildings and leasehold improvements

Ground and other equipment

Purchase deposits and assets under development

Total

Year ended December 31, 2017AtJanuary1,2017 $ 7,030 $ 409 $ 184 $ 897 $ 8,520Additions 1,769 8 29 573 2,379Reclassifications 309 62 36 (407) -Disposals (713) - - - (713)Depreciation (852) (41) (41) - (934)AtDecember31,2017 $ 7,543 $ 438 $ 208 $ 1,063 $ 9,252

At December 31, 2017Cost $ 11,320 $ 899 $ 545 $ 1,063 $ 13,827Accumulateddepreciation (3,777) (461) (337) - (4,575)

$ 7,543 $ 438 $ 208 $ 1,063 $ 9,252

Year ended December 31, 2018AtJanuary1,2018 $ 7,543 $ 438 $ 208 $ 1,063 $ 9,252Additions 1,579 - 31 429 2,039Reclassifications 517 42 - (559) -Disposals (496) - - - (496)Depreciation (980) (44) (42) - (1,066)AtDecember31,2018 $ 8,163 $ 436 $ 197 $ 933 $ 9,729

At December 31, 2018Cost $ 12,123 $ 924 $ 567 $ 933 $ 14,547Accumulateddepreciation (3,960) (488) (370) - (4,818)

$ 8,163 $ 436 $ 197 $ 933 $ 9,729

AsatDecember31,2018,propertyandequipmentincludedfinanceleasedassetsincluding8aircraft(2017–9)withanetbookvalueof$96(2017–$104)andfacilitieswithanetbookvalueof$32(2017–$34).

Includedinaircraftandflightequipmentare21aircraftand16spareengines(2017–21aircraftand14spareengines)whichareleasedtoCPAcarrierswithacostof$395(2017–$387)lessaccumulateddepreciationof$157(2017–$142)foranetbookvalueof$238(2017–$245).Depreciationexpensefor2018fortheseaircraftandflightequipmentamountedto$25(2017–$21).

AsfurtherdescribedinNote21,during2018,theCorporationsold25Embraer190aircraftwithacostof$789lessaccumulateddepreciationof$308foranetbookvalueof$481.

CertainpropertyandequipmentarepledgedascollateralasfurtherdescribedundertheapplicabledebtinstrumentinNote7.TherearenoimpairmentsrecordedasatDecember31,2018.

2018 ANNUAL REPORT


5. INTANGIBLE ASSETS

International route rights

and slots

Marketing based trade

names

Technology based

(internally developed)

Total

Year ended December 31, 2017AtJanuary1,2017 $ 97 $ 88 $ 130 $ 315Additions - - 41 41Amortization - - (38) (38)AtDecember31,2017 $ 97 $ 88 $ 133 $ 318

At December 31, 2017Cost $ 97 $ 88 $ 458 $ 643Accumulatedamortization - - (325) (325)

$ 97 $ 88 $ 133 $ 318

Year ended December 31, 2018AtJanuary1,2018 $ 97 $ 88 $ 133 $ 318Additions - - 122 122Amortization - - (36) (36)AtDecember31,2018 $ 97 $ 88 $ 219 $ 404

At December 31, 2018Cost $ 97 $ 88 $ 579 $ 764Accumulatedamortization - - (360) (360)

$ 97 $ 88 $ 219 $ 404

In2018,technology-basedassetswithcostof$1(2017–$38)andaccumulatedamortizationof$1(2017–$38)wereretired.

CertaininternationalrouterightsandslotsarepledgedassecurityforseniorsecurednotesasdescribedinNote7.

Anannualimpairmentreviewisconductedonallintangibleassetsthathaveanindefinitelife.Internationalrouterightsandslotsandmarketingbasedtradenamesareconsideredtohaveanindefinitelife.Theimpairmentreviewiscarriedoutatthecash-generatingunitlevel.Onthisbasis,animpairmentreviewwasperformedatthenarrow-bodyandwide-bodyfleetlevelsforaircraftandrelatedassetssupportingtheoperatingfleet.Theallocationoftheindefinitelivedintangibleassetstothecash-generatingunitswas$138towide-bodyand$47tonarrow-body.

Therecoverableamountofthecash-generatingunitshasbeenmeasuredbasedonthefairvaluelesscosttodispose,usingadiscountedcashflowmodel.Thediscountedcashflowmodelwouldrepresentalevel3fairvaluemeasurementwithintheIFRS13fairvaluehierarchy.CashflowprojectionsarebasedontheannualbusinessplanapprovedbytheBoardofDirectorsofAirCanada.Inaddition,management-developedprojectionsaremadecoveringafive-yearperiod.Thesecashflowsaremanagement’sbestestimateoffutureeventstakingintoaccountpastexperienceandfutureeconomicassumptions,suchastheforwardcurvesforcrude-oilandtheapplicableexchangerates.Cashflowsbeyondthefive-yearperiodareprojectedtoincreaseconsistentwiththelong-termgrowthassumptionoftheairlineindustryconsideringvariousfactorssuchastheCorporation’sfleetplansandindustrygrowthassumptions.ThediscountrateappliedtothecashflowprojectionsisderivedfrommarketparticipantassumptionsregardingtheCorporation’sweightedaveragecostofcapitaladjustedfortaxesandspecificrisksassociatedwiththecash-generatingunitbeingtested.

2018 ANNUAL REPORT


Duetotherecoverableamountexceedingthecarryingvalueofthecashgeneratingunitsbyasignificantmargin,themostrecentcalculationfromthe2017periodwascarriedforwardandusedintheimpairmenttestinthecurrentperiod.Keyassumptionsusedforthefairvaluelesscoststodisposecalculationsinfiscal2017wereasfollows:

2017

Discountrate 12.6%Long-termgrowthrate 2.5%Jetfuelpricerangeperbarrel US$66–US$79

Therecoverableamountofbothcash-generatingunitsexceededtheirrespectivecarryingvaluesbyanaggregateamountofapproximately$7,400.ReasonablypossiblechangesinkeyassumptionswouldnotcausetherecoverableamountofeachCGUtobelessthanthecarryingvalue.

6. GOODWILL

Goodwillistestedatleastannuallyforimpairment.Forthepurposeofimpairmenttesting,goodwillistestedforimpairmentusingthefairvaluelesscosttodisposemodelattheoperatingsegmentlevel.AirCanadaismanagedasoneoperatingsegmentbasedonhowfinancialinformationisproducedinternallyforthepurposesofmakingoperatingdecisions,anditisthelowestlevelatwhichgoodwillismonitoredforinternalmanagementpurposes.

Inassessingthegoodwillforimpairment,theCorporationcomparestheaggregaterecoverableamountconsistingofthesumofitsquotedequitymarketcapitalizationandthefairvalueofitsdebttothecarryingvalueofitsnetassetsexcludinglongtermdebt.Animpairmentchargeisrecognizedtotheextentthatthecarryingvalueexceedstherecoverableamount.Noimpairmentlosseshavebeenrecordedagainstthevalueofgoodwillsinceitsacquisition.

NoimpairmentchargeshavearisenasaresultofthereviewsperformedasatDecember31,2018and2017.Reasonablypossiblechangesinkeyassumptionswouldnotcausetherecoverableamountofgoodwilltofallbelowthecarryingvalue.

2018 ANNUAL REPORT


7. LONG-TERM DEBT AND FINANCE LEASES

Final Maturity

Weighted Average Interest Rate (%)

2018 2017

Aircraftfinancing(a)FixedrateU.S.dollarfinancing 2020–2030 3.84 $ 3,592 $ 2,828FloatingrateU.S.dollarfinancing 2020–2027 4.39 676 871FixedrateCDNdollarfinancing 2026–2030 3.76 287 -FloatingrateCDNdollarfinancing 2026–2027 2.89 298 332FixedrateJapaneseyenfinancing 2027 1.84 146 131FloatingrateJapaneseyenfinancing 2020–2027 0.88 42 61

Seniorsecurednotes–CDNdollar(b) 2023 4.75 200 200Seniorunsecurednotes–U.S.dollar(c) 2021 7.75 546 503Othersecuredfinancing–U.S.dollar(b) 2023 4.52 786 1,073Long-term debt 4.22 6,573 5,999Financeleaseobligations(d) 2020-2033 9.27 187 223Total debt and finance leases 4.36 6,760 6,222Unamortizeddebtissuancecosts (108) (103)Currentportion (455) (671)Long-term debt and finance leases $ 6,197 $ 5,448

(a) Aircraftfinancing(US$3,130,C$585andJPY¥15,155)(2017–US$2,943,C$332andJPY¥17,208)issecuredprimarilybyspecificaircraftwithacarryingvalueof$5,575(2017–$5,230).Forthemajorityofthefinancing,principalandinterestisrepayablequarterlyuntilmaturityandcanberepaidatanytimewiththepaymentofapplicablefees.US$222,C$298andJPY¥2,482ofthefinancingissupportedbyaloanguaranteebytheExport-ImportBankoftheUnitedStates(“EXIM”).

In2018,inconnectionwiththefinancingoftheacquisitionofonenewBoeing787-9aircraftandfournewBoeing737MAX-8aircraft,AirCanadaenteredintoacertificatepurchaseagreementforaprivateofferingoftwotranchesofenhancedequipmenttrustcertificateswithacombinedaggregatefaceamountof$301andaweightedaverageinterestrateof3.76%perannum,andafinalexpectedmaturitydateof2030.Proceedsfromtheofferingweredisbursedfollowingdeliveryoftheaircraft.TheseproceedsareincludedinfixedrateCDNdollarfinancinginthetableabove.

In2017,inconnectionwiththefinancingoffournewBoeing787-9andninenewBoeing737MAX-8aircraft,AirCanadacompletedtheclosingofaprivateofferingofthreetranchesofenhancedequipmenttrustcertificates(“EETC”)withacombinedaggregatefaceamountofUS$719.TheprivateofferingwascomprisedofClassAAcertificates,ClassAcertificates,andClassBcertificateswithfinalexpectedmaturitydatesbetween2026and2030.Thethreetranchesof

certificateshaveacombinedweightedaverageinterestrateof3.42%.Proceedsfromtheofferingweredisbursedduring2018followingdeliveryoftheaircraft.TheprincipalamountofUS$719isincludedinfixedrateU.S.dollarfinancinginthetableabove.Financingfeespaidinconjunctionwiththeofferingin2017were$10andarereportedinFinancingontheconsolidatedstatementofcashflow.

In2017,inconnectionwiththeacquisitionoffourBoeing787-9aircraft,theCorporationcompletedafinancing,maturingin2027andcomprisedofaprincipalofUS$439subjecttoafloatingrate,JPY¥11,743subjecttoafixedrateandJPY¥1,247subjecttoafloatingrate.ThesefinancingsweresecuredusingJapaneseOperatingLeaseswithaCallOption(“JOLCO”)structureswiththetransactionsrecordedasloansandtheaircraftasownedforaccountingpurposesintheCorporation’sconsolidatedfinancialstatements.Financingfeespaidin2017inconnectionwiththeJOLCOstructureswere$13andarereportedinFinancingontheconsolidatedstatementofcashflow.

InconnectionwiththesalestransactiondescribedinNote21,long-termdebtof$144(US$109)relatedtotheEmbraer190aircraftwasrepaidin2018.ThelossrecordedinGain(loss)ondebtsettlementsandmodificationsinrespectoftheprepaymentofsuchdebtwas$2.

2018 ANNUAL REPORT


During2018,principalofUS$35wasprepaidrelatingtothefinancingofthreeBoeing777aircraft.ThelossrecordedinGain(loss)ondebtsettlementsandmodificationsinrespectoftheprepaymentofsuchdebtwaslessthan$1.

During2017,principalofUS$27wasprepaidrelatingtothefinancingofoneA330aircraftandprincipalofUS$25relatingtothefinancingoffourEmbraer190aircraft.Alossof$5isincludedinGain(loss)ondebtsettlementsandmodificationsrelatedtotheprepaymentofsuchfixedratedebt.

(b) InOctober2016,aspartofarefinancingtransaction,AirCanadaenteredintoapurchaseagreementwithasyndicateofinitialpurchasersrelatingtoaprivateofferingof$200aggregateprincipalamountof4.75%seniorsecuredfirstliennotesdue2023(the“2016SeniorNotes”),whichweresoldatpar.AirCanadaalsoreceivedproceedsofaUS$800termloan,maturingin2023,andenteredintoanewUS$300revolvingcreditfacilityexpiringin2021(collectivelywiththetermloan,the“2016CreditFacility”).Therevolvingcreditfacilityhadaninitialinterestrateof275basispointsoverLIBOR(subjecttoaLIBORfloorof75basispoints).

InJune2017,AirCanadacompletedarepricingofitsUS$1.1billion2016CreditFacility,reducingtheinterestrateby50basispoints,toaninterestrateof225basispointsoverLIBOR(subjecttoaLIBORfloorof75basispoints).TheCorporationrecordeda$27Gainondebtsettlementsandmodificationsrelatedtothistransaction.

InFebruary2018,AirCanadacompletedasecondrepricingofitsUS$1.1billion2016CreditFacility,reducingtheinterestrateby25basispoints,toaninterestrateof200basispointsoverLIBOR(subjecttoaLIBORfloorof75basispoints).TheCorporationrecordedan$11Gainondebtsettlementsandmodificationsrelatedtothistransaction.

InDecember2018,AirCanadaamendedthe2016CreditFacility.TheamendmenthadtheeffectofincreasingtherevolvingcreditfacilitytoUS$600,reducingtheoutstandingtermloantoUS$600,concurrentwiththeadditionalrepaymentofUS$192ofoutstandingtermloan,andextendingtherevolvingloancommitmentterminationdateto2023.Thisrepaymentwasmadewithintheinitialtermsoftheloanagreement.

InDecember2018,AirCanadaenteredintoanew$200revolvingcreditfacility.Thefacilityisavailableuntil2021and,ifdrawn,wouldbesecuredbycertaindesignatedaircraft.NoamountshavebeendrawnonthefacilityatDecember31,2018.

AirCanadamayredeemsomeorallofthe2016SeniorNotesatanytimeonorafterOctober6,2019atcertainestablishedredemptionprices,plusaccruedandunpaidinterest.AtanytimepriortoOctober6,2019,AirCanadamayredeemsomeorallofthe2016SeniorNotesatapriceequalto100%oftheirprincipalamountredeemedplusa“make-whole”premiumandaccruedandunpaidinterest.AtanytimepriortoOctober6,2019,AirCanadamayredeemupto35%oftheaggregateprincipalamountofthe2016SeniorNoteswiththeproceedsofcertainequityofferings,atestablishedredemptionprices,plusaccruedandunpaidinterest.Inaddition,atanytimeandfromtimetotimepriortoOctober6,2021,AirCanadamayredeem,duringanytwelve-monthperiod,upto10%oftheoriginalaggregateprincipalamountofthe2016SeniorNotesataredemptionpriceof103%oftheprincipalamount,plusaccruedandunpaidinterest.

The2016SeniorNotesandtheCorporation’sobligationsunderthe2016CreditFacilityareseniorsecuredobligationsofAirCanada,securedonafirstlienbasis,subjecttocertainpermittedliensandexclusions,bycertainrealestateinterests,groundserviceequipment,certainairportslotsandgateleaseholds,andcertainPacificroutesandtheairportslotsandgateleaseholdsutilizedinconnectionwiththosePacificroutes.

OtherU.S.dollarsecuredfinancingsarefloatingratefinancingsthataresecuredbycertainassetsincludingassetsdescribedaboverelatingtothe2016CreditFacility.Asdescribedabove,during2018,theCorporationprepaidUS$192oftheoutstandingtermloan.AsatDecember31,2018,theCorporationhadnotdrawnontherevolvingcreditfacilityandtheoutstandingtermloanprincipalwasUS$598(2017-US$798principal).

(c) PrivateofferingofUS$400of7.75%seniorunsecurednotesdue2021,withinterestpayablesemi-annually.AirCanadamayatanytimeandfromtimetotimeredeemsomeoralloftheseniorunsecurednotesataredemptionpriceequaltothegreaterof(i)100%oftheprincipalamountofthenotesbeingredeemedand(ii)a“make-whole”amount,ifany,plus,ineithercaseaccruedandunpaidinterest.

(d)Financeleases,relatedtofacilitiesandaircraft,total$187($61andUS$92)(2017-$223($64andUS$126)).During2018,theCorporationrecordedinterestexpenseonfinanceleaseobligationsof$19(2017–$23).Thecarryingvalueofaircraftandfacilitiesunderfinanceleasesamountedto$96and$32respectively(2017–$104and$34).

CashinterestpaidonLong-termdebtandfinanceleasesin2018bytheCorporationwas$281(2017–$287).

2018 ANNUAL REPORT


Maturity Analysis

PrincipalandinterestrepaymentrequirementsasatDecember31,2018onLong-termdebtandfinanceleaseobligationsareasfollows.U.S.dollaramountsareconvertedusingtheDecember31,2018closingrateofC$1.3637.

2019 2020 2021 2022 2023 Thereafter Total

PrincipalLong-termdebtobligations $407 $640 $ 1,003 $ 342 $ 1,450 $ 2,731 $ 6,573Financeleaseobligations 48 50 17 15 16 41 187

$ 455 $ 690 $ 1,020 $ 357 $ 1,466 $ 2,772 $ 6,760

Interest Long-termdebtobligations 273 258 214 176 151 346 1,418Financeleaseobligations 14 10 6 5 4 10 49

$ 287 $ 268 $ 220 $ 181 $ 155 $ 356 $ 1,467

Principalrepaymentsinthetableaboveexcludetransactioncostsof$108whichareoffsetagainstLong-termdebtandfinanceleasesintheconsolidatedstatementoffinancialposition.

2018 ANNUAL REPORT


Cash flows from financing activities

Informationonthechangeinliabilitiesforwhichcashflowshavebeenclassifiedasfinancingactivitiesinthestatementofcashflowsispresentedbelow.

Cash Flows Non-Cash Changes

January 1, 2018

Borrowings Repayments Financing Fees

Foreign exchange

adjustments

Amortization of Financing

Fees

OtherNon-Cash

Adjustments

December 31, 2018

Longtermdebt $ 5,999 $ 1,210 $ (1,122) $ - $ 492 $ - $ (6) $ 6,573Leaseliabilities 223 - (45) - 9 - - 187

Unamortizeddebtissuancecosts

(103) - - (12) - 20 (13) (108)

Total liabilities from financing activities

$ 6,119 $ 1,210 $ (1,167) $ (12) $ 501 $ 20 $ (19) $ 6,652

Cash Flows Non-Cash Changes

January1,2017

Borrowings Repayments FinancingFees

Foreignexchange

adjustments

AmortizationofFinancing

Fees

OtherNon-Cash

Adjustments

December31,2017

Longtermdebt $ 6,447 $ 733 $ (766) $ - $ (392) $ - $ (23) $ 5,999Leaseliabilities 275 - (42) - (10) - - 223

Unamortizeddebtissuancecosts

(104) - - (16) - 17 - (103)

Total liabilities from financing activities

$ 6,618 $ 733 $ (808) $ (16) $ (402) $ 17 $ (23) $ 6,119

In2017,financingfeesof$10paidinconjunctionwiththe2017EETCofferingwerereportedinFinancingontheconsolidatedstatementofcashflowbutexcludedfromthistable.ThesefeeswererecordedinDepositsandotherassetsuntildeliveryoftheaircraftandrelatedrecognitionoflong-termdebt.Lossondebtsettlementsof$3(2017-$6)isincludedinReductionoflong-termdebtandfinanceleaseobligationsontheconsolidatedstatementofcashflowbutexcludedfromthistable.

2018 ANNUAL REPORT


8. PENSIONS AND OTHER BENEFIT LIABILITIES

TheCorporationmaintainsseveraldefinedbenefitanddefinedcontributionplansprovidingpension,otherpost-retirementandpost-employmentbenefitstoitsemployees.

TheCorporationistheadministratorandsponsoringemployerofeightDomesticRegisteredPlans(“DomesticRegisteredPlans”)withdefinedbenefitcommitmentsregisteredunderthePensionBenefitsStandardAct,1985(Canada).TheU.S.plan,UKplanandJapanplanareinternationalplanscoveringmembersinthosecountries.Inaddition,theCorporationmaintainsanumberofsupplementarypensionplanswhicharenotregistered.Thedefinedbenefitpensionplansprovidebenefitsuponretirement,terminationordeathbasedonthemember’syearsofserviceandfinalaverageearningsforaspecifiedperiod.Benefitpaymentsarefromtrustee-administeredfunds,howevertherearealsoanumberofunfundedplanswheretheCorporationmeetsthebenefitpaymentobligationasitfallsdue.Planassetsheldintrustsaregovernedbyregulations.Thegovernanceoftheplans,overseeingallaspectsoftheplansincludinginvestmentdecisionsandcontributions,liesprimarilywiththeCorporation.TheHumanResourcesandCompensationCommittee,acommitteeoftheBoardofDirectors,assistsinthemonitoringandoversightoftheplanstoensurepensionliabilitiesareappropriatelyfunded,pensionassetsareprudentlyinvested,riskismanagedatanacceptablelevelandretirementbenefitsareadministeredinaproperandeffectivemanner.

Otheremployeebenefitsincludehealth,lifeanddisability.Thesebenefitsconsistofbothpost-employmentandpost-retirementbenefits.Thepost-employmentbenefitsrelatetodisabilitybenefitsavailabletoeligibleactiveemployees,whilethepost-retirementbenefitsarecomprisedofhealthcareandlifeinsurancebenefitsavailabletoeligibleretiredemployees.

Pension Plan Cash Funding Obligations

Pensionfundingobligations(includingprojectedfundingobligations)mayvarysignificantlybasedonawidevarietyoffactors,includingtheassumptionsusedinthemostrecentlyfiledactuarialvaluationreports(includingtheapplicablediscountrateusedorassumedintheactuarialvaluation),theplandemographicsatthevaluationdate,theexistingplanprovisions,legislativeandregulatorydevelopmentsandchangesineconomicconditions(mainlythereturnonplanassetsandchangesininterestrates)andotherfactors.Actualcontributionsthataredeterminedonthebasisoffuturevaluationreportsmayvarysignificantlyfromprojections.

AsatJanuary1,2018,theaggregatesolvencysurplusinthedomesticregisteredpensionplanswas$2.6billion.ThenextrequiredvaluationtobemadeasatJanuary1,2019willbecompletedinthefirsthalfof2019.WiththeCorporation’sdomesticregisteredpensionplansinasolvencysurpluspositionasatJanuary1,2018,pastservicecostpaymentswerenotrequiredin2018.Inaddition,inaccordancewithlegislationandapplicableplanrules,theexcessover105%onasolvencybasiscanbeusedtoreducecurrentservicecontributionsunderthedefinedbenefitcomponentortofundtheemployercontributiontoadefinedcontributioncomponentwithinthesamepensionplan.Basedonthat,andincludingtheinternationalandsupplementalplans,thetotalemployerpensionfundingcontributionsduring2018amountedto$83($94employercontributionnetof$11usedtofundemployercontributionindefinedcontributioncomponentsofthesameplans).Pensionfundingobligationsfor2019areexpectedtobe$93.

2018 ANNUAL REPORT


Benefit Obligation and Plan Assets

TheseconsolidatedfinancialstatementsincludealloftheassetsandliabilitiesofallCorporation-sponsoredplans.Theamountsrecordedinthestatementoffinancialpositionareasfollows:

Pension Benefits

Other Employee

Future Benefits

Total

2018 2017 2018 2017 2018 2017

Non-current assetsPensionassets $ 1,969 $ 1,583 $ - $ - $ 1,969 $ 1,583Current liabilitiesAccountspayableandaccruedliabilities - - 60 61 60 61Non-current liabilities Pensionandotherbenefitliabilities 1,328 1,311 1,219 1,281 2,547 2,592Net benefit obligation (asset) $ (641) $ (272) $ 1,279 $ 1,342 $ 638 $ 1,070

Thecurrentportionofthenetbenefitobligationrepresentsanestimateofotheremployeefuturebenefitsclaimstobepaidduring2019.

2018 ANNUAL REPORT


Thefollowingtablepresentsfinancialinformationrelatedtothechangesinthepensionandotherpost-employmentbenefitsplans:

Pension Benefits

Other Employee

Future Benefits

2018 2017 2018 2017

Change in benefit obligationBenefitobligationatbeginningofyear $ 20,260 $ 19,135 $ 1,342 $ 1,301Currentservicecost 304 265 35 30Pastservicecost 5 - (8) -Interestcost 723 739 48 51Employees’contributions 82 81 - -Benefitspaid (862) (845) (48) (47)Remeasurements:

Experienceloss(gain) (11) 34 (28) (45)Loss(gain)fromchangeindemographicassumptions (262) - (14) -Loss(gain)fromchangeinfinancialassumptions (583) 855 (56) 64

Plansettlements - - (6) -Foreignexchangeloss(gain) 34 (4) 14 (12)Totalbenefitobligation 19,690 20,260 1,279 1,342Change in plan assetsFairvalueofplanassetsatbeginningofyear 21,191 19,438 - -

Returnonplanassets,excludingamountsincludedinNetfinancingexpense

(399) 1,708 - -

Interestincome 745 739 - -Employercontributions 83 81 51 47Employees’contributions 82 81 - -Benefitspaid (862) (845) (48) (47)Settlements - - (3) -Administrativeexpensespaidfromplanassets (12) (12) - -Foreignexchangegain(loss) 29 1 - -Totalplanassets 20,857 21,191 - -(Surplus) deficit at end of year (1,167) (931) 1,279 1,342Assetceiling/additionalminimumfundingliability 526 659 - -Net benefit obligation (asset) $ (641) $ (272) $ 1,279 $ 1,342

Theactualreturnonplanassetswas$346(2017–$2,447).

Thepensionbenefitdeficitofonlythoseplansthatarenotfullyfundedisasfollows:

2018 2017

Domesticregisteredplans $ 4 $ 3Internationalplans 85 78Supplementaryplans 1,239 1,230

$ 1,328 $ 1,311

Theweightedaveragedurationofthedefinedbenefitobligationis14.2years(2017–14.3years).

2018 ANNUAL REPORT


Pension and Other Employee Future Benefit Expense

TheCorporationhasrecordednetdefinedbenefitpensionandotheremployeefuturebenefitsexpenseasfollows:

Pension Benefits

Other Employee

Future Benefits

2018 2017 2018 2017

Consolidated Statement of OperationsComponentsofcost

Currentservicecost $ 304 $ 265 $ 35 $ 30Pastservicecost 5 - (8) -Plansettlements - - (3) -Administrativeandotherexpenses 12 12 - -Actuarialgains,includingforeignexchange - - (4) (7)

Total cost recognized in Wages, salaries and benefits $ 321 $ 277 $ 20 $ 23Net financing expense relating to employee benefits $ 2 $ 14 $ 48 $ 51Total cost recognized in statement of operations $ 323 $ 291 $ 68 $ 74Consolidated Other Comprehensive (Income) LossRemeasurements:Experienceloss(gain),includingforeignexchange (6) 29 (10) (50)Loss(gain)fromchangeindemographicassumptions (262) - (14) -Loss(gain)fromchangeinfinancialassumptions (583) 855 (56) 64Returnonplanassets 399 (1,708) - -Changeinassetceiling (159) 299 - -Total cost (income) recognized in OCI $ (611) $ (525) $ (80) $ 14

In2018,theCorporationofferedavoluntarybuyoutprogramforretireelifeandhealthbenefits.Theacceptedofferswererecognizedasaplanamendmentandsettlementforacombinedgainof$8.

Certainplanamendmentsmadeinconjunctionwiththe2014ACPAcollectiveagreementwereorareconditionalonmeetingdefinedbusinessplantargetstiedtothenumberofoperatingaircraftinthefleetby2020and2023.DuringtheyearendedDecember31,2018,actuariallossesof$43(2017-actuariallossesof$35)wererecognizedinothercomprehensiveincomerelatedtochangesinassumptionsassociatedwithcostofpensionincreasesapplicabletoaffectedmembersofACPA.

Thefundingofemployeebenefitsascomparedtotheexpenserecordedintheconsolidatedstatementofoperationsissummarizedinthetablebelow.

2018 2017

Net defined pension and other future employee benefits expense recorded in the consolidated statement of operations

Wages,salariesandbenefits $ 341 $ 300Netfinancingexpenserelatingtoemployeebenefitliabilities 50 65

$ 391 $ 365Employee benefit funding by Air Canada Pensionbenefits $ 83 $ 81Otheremployeebenefits 51 47

$ 134 $ 128Employee benefit funding less than expense $ 257 $ 237

2018 ANNUAL REPORT


Composition of Defined Benefit Pension Plan Assets

Domestic Registered PlansThecompositionoftheDomesticRegisteredPlanassetsandthetargetallocationarethefollowing:

2018 2017 TargetAllocation

Bonds 71% 70% 60%Canadianequities 3% 3% 7%Foreignequities 6% 7% 13%Alternativeinvestments 20% 20% 20%

100% 100% 100%

FortheDomesticRegisteredPlanassets,approximately80%ofassetsasofDecember31,2018haveaquotedmarketpriceinanactivemarket.Assetsthatdonothaveaquotedmarketpriceinanactivemarketaremainlyinvestmentsinprivatelyheldentities.Theassetcompositioninthetablerepresentstheallocationofplanassetstoeachassettype.

Includedinplanassets,fordeterminingthenetbenefitobligationforaccountingpurposes,are17,646,765(2017-17,646,765)sharesofAirCanadawhichwereissuedtoatrustin2009inconnectionwithpensionfundingagreementsreachedwithalloftheCorporation’sCanadian-basedunions.Thetrustarrangementprovidesthatproceedsofanysaleofthetrustshareswillberetainedandappliedtoreducefuturepensionsolvencydeficits,ifanyshouldmaterialize.WiththeCorporation’sdomesticregisteredpensionplansnowinasurpluspositiononasolvencybasis,theaccountingrulespreventtherecognitionofthevalueofthesharesheldintrustaspartofthepensionassets.Thesharesheldintrusthaveafairvalueof$458atDecember31,2018(2017-$457),howeveraftergivingeffecttotheassetceiling,therecognizedaccountingvalueofthetrustassetisnil.

2018 ANNUAL REPORT


FortheDomesticRegisteredPlans,theinvestmentsconformtotheStatementofInvestmentPolicyandObjectivesoftheAirCanadaPensionFunds.Aspermittedundertheinvestmentpolicy,theactualassetmixmaydeviatefromthetargetallocationfromtimetotime.ThedeviationsatDecember31,2018arewithinthelimitsestablishedintheinvestmentpolicy.Theinvestmentreturnobjectiveistoachieveatotalannualizedrateofreturnthatexceedsbyaminimumof1.0%beforeinvestmentfeesonaverageoverthelongterm(i.e.10years)thetotalannualizedreturnthatcouldhavebeenearnedbypassivelymanagingtheLiabilityReplicatingPortfolio.TheLiabilityReplicatingPortfolio,whichisreferencedtowidelyusedCanadianfixedincomeindices(FTSETMXCanada),closelymatchesthecharacteristicsofthepensionliabilities.

Recognizingtheimportanceofsurplusriskmanagement,AirCanadamanagestheDomesticRegisteredPlansinanefforttomitigatesurplusrisk(definedasthedifferencebetweenassetvalueandpensionliabilityvalue),whichisconsideredtobethekeyrisktobeminimizedandmonitored.Inaddition,theobjectiveoftheinvestmentstrategyistoinvesttheplanassetsinaprudentanddiversifiedmannertomitigatetheriskofpricefluctuationofassetclassesandindividualinvestmentswithinthoseassetclassesandtocombinethoseassetclassesandindividualinvestmentsinanefforttoreduceoverallrisk.

Inadditiontothebroadassetallocation,assummarizedintheassetallocationsectionabove,thefollowingpoliciesapplytoindividualassetclassesinvestedwithinthepensionfunds:

> Equitiesarerequiredtobediversifiedamongregions,industriesandeconomicsectors.Limitationsareplacedontheoverallallocationtoanyindividualsecurity.

> Alternativeinvestmentsareinvestmentsinnon-publiclytradedsecuritiesandinnon-traditionalassetclasses.Theymaycomprise,butarenotlimitedto,investmentsinrealestate,agriculture,timber,privateequity,venturecapital,infrastructure,emergingmarketsdebt,highyieldbondsandcommodityfutures.Alternativeinvestmentsarerequiredtobediversifiedbyassetclass,strategy,sectorandgeography.

> Canadianbondsareorientedtowardlongterminvestmentgradesecuritiesrated“BBB”orhigher.WiththeexceptionofGovernmentofCanadasecuritiesoraprovincethereofortheU.S.Government,inwhichtheplanmayinvesttheentirefixedincomeallocation,theseinvestmentsarerequiredtobediversifiedamongindividualsecuritiesandsectors.

Derivativesarepermittedprovidedthattheyareusedformanagingaparticularrisk(includinginterestrateriskrelatedtopensionliabilities)ortocreateexposurestogivenmarketsandcurrenciesandthatcounterpartieshaveaminimumcreditratingofA.TheCorporationmanagesinterestrateriskrelatedtoitsactuarialliabilitiesthroughacombinationoffinancialinstrumentsincluding,butnotlimitedto,bonds,bondrepurchaseandreverserepurchaseagreements,bondforwards,bondfuturesandinterestrateswaps.AsatDecember31,2018,takingintoaccounttheeffectofsuchfinancialinstrumentriskmanagementtools,approximately81%ofAirCanada’spensionliabilitieswerematchedwithfixedincomeproductstomitigateasignificantportionoftheinterestrate(discountrate)risk.Counterpartycreditriskassociatedwithsuchfinancialinstrumentsismitigatedbyreceivingcollateralfromcounterpartiesbasedoncollateralizationagreements,aswellasbymonitoringthecounterparties’creditratingsandensuringcompliancewiththeinvestmentpolicy.ThefairvalueofthesederivativeinstrumentsisincludedintheBondsintheassetcompositiontableandisnotasignificantcomponentoftheaggregatebondfairvaluesoftheportfolio.

Thetrustsforthesupplementalplansareinvested50%inindexedequityinvestments,inaccordancewiththeirinvestmentpolicies,withtheremaining50%heldbytheCanadaRevenueAgencyasarefundabletax,inaccordancewithtaxlegislation.

2018 ANNUAL REPORT


Risks

Throughitsdefinedbenefitpensionplans,theCorporationisexposedtoanumberofrisks,themostsignificantofwhicharedetailedbelow:

Assetrisk

Assetriskistheriskthatthefairvalueoffuturecashflowsofafinancialinstrumentwillfluctuatebecauseofchangesinmarketprice.Assetriskcomprisescurrencyrisk,creditrisk,andotherpricerisk.Currencyriskistheriskthatthefairvalueorfuturecashflowsofafinancialinstrumentwillfluctuatebecauseofchangesinforeignexchangerates.Thisriskismitigatedthroughimplementationofhedgingstrategies.Creditriskistheriskthatonepartytoafinancialinstrumentwillcauseafinanciallossfortheotherpartybyfailingtodischargeanobligation.Thisriskismitigatedbyreceivingcollateralfromcounterpartiesbasedoncollateralizationagreementsandbymonitoringtheissuers’creditrisk.Otherpriceriskistheriskthefairvalueorfuturecashflowsofafinancialinstrumentwillfluctuatebecauseofchangesinmarketprices(otherthanthosearisingfromcurrencyrisk),whetherthosechangesarecausedbyfactorsspecifictotheindividualfinancialinstrumentoritsissuer,orfactorsaffectingallsimilarfinancialinstrumentstradedinthemarket.Thisriskismitigatedthroughproperdiversificationofplanassets.

Interestraterisk

Interestrateriskistheriskthatthefairvalueoffuturecashflowsofafinancialinstrumentwillfluctuatebecauseofchangesinmarketinterestrates.Adecreaseincorporateand/orgovernmentbondyieldswillincreaseplanliabilities,whichwillbepartiallyoffsetbyanincreaseinthevalueoftheplans’bondholdings.AsatDecember31,2018,approximately81%ofAirCanada’spensionliabilities(includingtheeffectoffinancialinstrumentriskmanagementtools)werematchedwithfixedincomeproductstomitigateasignificantportionoftheinterestraterisk(discountraterisk).

Fundingrisk

Adversechangesinthevalueofplanassetsorininterestrates,andthereforeinthediscountrateusedtovalueliabilities,couldhaveasignificantimpactonpensionplansolvencyvaluationsandfuturecashfundingrequirements.

Lifeexpectancy

Themajorityoftheplans’obligationsaretoprovidebenefitsforthelifeofthemember,soincreasesinlifeexpectancywillresultinanincreaseintheplans’liabilities.

Assumptions

ManagementisrequiredtomakesignificantestimatesaboutactuarialandfinancialassumptionstodeterminethecostandrelatedliabilitiesoftheCorporation’semployeefuturebenefits.

DiscountRate

Thediscountrateusedtodeterminethepensionobligationwasdeterminedbyreferencetomarketinterestratesoncorporatebondsrated“AA”orbetterwithcashflowsthatapproximatethetimingandamountofexpectedbenefitpayments.

FutureIncreasesinCompensation

Estimatessurroundingassumptionsoffutureincreasesincompensationarebaseduponthecurrentcompensationpolicies,theCorporation’slongrange-plans,labourandemploymentagreementsandeconomicforecasts.

2018 ANNUAL REPORT


ThesignificantweightedaverageassumptionsusedtodeterminetheCorporation’saccruedbenefitobligationsandcostareasfollows:

Pension Benefits

Other Employee

Future Benefits

2018 2017 2018 2017

Discount rate used to determine:

NetinterestonthenetdefinedbenefitobligationfortheyearendedDecember31

3.60% 3.90% 3.60% 3.90%

ServicecostfortheyearendedDecember31 3.70% 4.10% 3.70% 4.10%AccruedbenefitobligationasatDecember31 3.81% 3.60% 3.81% 3.60%

Rate of future increases in compensation used to determine:

AccruedbenefitcostandservicecostfortheyearendedDecember31

2.50% 2.50%not

applicablenot

applicable

AccruedbenefitobligationasatDecember31 2.50% 2.50%not

applicablenot

applicable

Sensitivity Analysis

Sensitivityanalysisisbasedonchangingoneassumptionwhileholdingallotherassumptionsconstant.Inpractice,thismaybeunlikelytooccur,andchangesinsomeoftheassumptionsmaybecorrelated.Whencalculatingthesensitivityofthedefinedbenefitobligationtovariationsinsignificantactuarialassumptions,thesamemethod(presentvalueofthedefinedbenefitobligationcalculatedwiththeprojectedunitcreditmethodattheendofthereportingperiod)hasbeenappliedasforcalculatingtheliabilityrecognizedintheconsolidatedstatementoffinancialposition.

Sensitivityanalysison2018pensionexpenseandnetfinancingexpenserelatingtopensionbenefitliabilities,basedondifferentactuarialassumptionswithrespecttodiscountrateissetoutbelow.Theeffectsoneachpensionplanofachangeinanassumptionareweightedproportionatelytothetotalplanobligationtodeterminethetotalimpactforeachassumptionpresented.

0.25 Percentage Point

Decrease Increase

Discount rate on obligation assumption Pensionexpense $ 22 $ (21)Netfinancingexpenserelatingtopensionbenefitliabilities 23 (21)

$ 45 $ (42)Increase (decrease) in pension obligation $ 703 $ (680)

Theincrease(decrease)inthepensionobligationfora0.25percentagepointchangeinthediscountraterelatestothegrossamountofthepensionliabilitiesandisbeforetheimpactofanychangeinplanassets.AsatDecember31,2018,approximately81%ofAirCanada’spensionliabilitieswerematchedwithfixedincomeproductstomitigateasignificantportionoftheinterestrate(discountrate)risk.

Anincreaseofoneyearinlifeexpectancywouldincreasethepensionbenefitobligationby$478.

2018 ANNUAL REPORT


Assumedhealthcarecosttrendrateshaveasignificanteffectontheamountsreportedforthehealthcareplans.A5.5%annualrateofincreaseinthepercapitacostofcoveredhealthcarebenefitswasassumedfor2018(2017–5.8%).Therateisassumedtodecreasegraduallyto5%by2020(2017–assumedtodecreasegraduallyto5%by2020).Aonepercentagepointincreaseinassumedhealthcaretrendrateswouldhaveincreasedthetotalofcurrentserviceandinterestcostsby$4andtheobligationby$55.Aonepercentagepointdecreaseinassumedhealthcaretrendrateswouldhavedecreasedthetotalofcurrentserviceandinterestcostsby$4andtheobligationby$58.

A0.25percentagepointdecreaseindiscountrateforotheremployeefuturebenefitswouldhaveincreasedthetotalofcurrentandinterestcostsbylessthan$1andtheobligationby$47.A0.25percentagepointincreaseindiscountratewouldhavedecreasedthetotalofcurrentandinterestcostsbylessthan$1andtheobligationby$44.

Defined Contribution Pension Plans

CertainoftheCorporation’smanagement,administrativeandunionizedemployeesparticipateinadefinedcontributionpensionplan,adefinedcontributioncomponentofaplanwhichalsoincludesadefinedbenefitcomponentoramulti-employerplanwhichareaccountedforasdefinedcontributionplans.TheCorporationcontributesanamountexpressedasapercentageofemployees’contributionswithsuchpercentagevaryingbygroupandforsomegroups,basedonthenumberofyearsofservice.Aspermittedbylegislationandapplicableplanrules,surplusinthedefinedbenefitcomponentcanbeusedtocovertheemployercontributionsinthedefinedcontributioncomponentofsuchplan.Assuch,$11ofsurplusinthedefinedbenefitcomponentsofthedomesticregisteredpensionplanswasusedtocovertheemployercontributionsinthedefinedcontributioncomponentsduring2018(2017–$9).

TheCorporation’sexpenseforthesepensionplansamountedto$30fortheyearendedDecember31,2018(2017–$21).Takingintoaccountavailablesurplusinthedefinedbenefitcomponentsofapplicableplanswhichmaybeexpectedtobeused,expectedtotalemployercontributionsfor2019are$22.

2018 ANNUAL REPORT


9. PROVISIONS FOR OTHER LIABILITIES

Thefollowingtableprovidesacontinuityscheduleofallrecordedprovisions.RefertoNote16foradditionalinformationonLitigationprovisions.CurrentprovisionsarerecordedinAccountspayableandaccruedliabilities.

Maintenance (a) Asset retirement (b)

Litigation Total provisions

At December 31, 2017

Current $ 68 $ - $ 17 $ 85Non-current 1,003 30 - 1,033

$ 1,071 $ 30 $ 17 $ 1,118Provisionsarisingduringtheyear $ 145 $ - $ 2 $ 147Amountsdisbursed - - (2) (2)Changesinestimatedcosts (72) - - (72)Accretionexpense 25 1 - 26Foreignexchangeloss 96 - - 96At December 31, 2018 $ 1,265 $ 31 $ 17 $ 1,313Current $ 147 $ - $ 17 $ 164Non-current 1,118 31 - 1,149

$ 1,265 $ 31 $ 17 $ 1,313

(a) Maintenanceprovisionsrelatetotheprovisionforthecoststomeetthecontractualreturnconditionsonaircraftunderoperatingleases.Theprovisionrelatestoleaseswithexpirydatesrangingfrom2019to2029withtheaverageremainingleasetermofapproximatelythreeyears.Themaintenanceprovisionstakeintoaccountcurrentcostsofmaintenanceevents,estimatesofinflationsurroundingthesecostsaswellasassumptionssurroundingutilizationoftherelatedaircraft.Assumingtheaggregatecostforreturnconditionsincreasesby5%,holdingallotherfactorsconstant,therewouldbeacumulativebalancesheetadjustmenttoincreasetheprovisionby$62atDecember31,2018andanincreasetomaintenanceexpensein2019ofapproximately$6.Expectedfuturecashflowstosettletheobligationarediscounted.Ifthediscountratesweretoincreaseby1%,holdingallotherfactorsconstant,therewouldbeacumulativebalancesheetadjustmenttodecreasetheprovisionby$21atDecember31,2018.Anequivalentbutoppositemovementinthediscountratewouldresultinasimilarimpactintheoppositedirection.

(b) Underthetermsofcertainlandandfacilitiesleases,theCorporationhasanobligationtorestorethelandtovacantconditionattheendoftheleaseandtorectifyanyenvironmentaldamageforwhichitisresponsible.Therelatedleasesexpireovertermsrangingfrom2019to2078.Theseprovisionsarebasedonnumerousassumptionsincludingtheoverallcostofdecommissioningandremediationandtheselectionofalternativedecommissioningandremediationapproaches.Thenon-currentprovisionisrecordedinOtherlong-termliabilities.

2018 ANNUAL REPORT


10. INCOME TAXES

Income Tax Expense

Incometaxrecordedintheconsolidatedstatementofoperationsispresentedbelow.

2018 2017Restated-Note2

Currentincometax $ (6) $ (16)Deferredincometax (232) 759Income tax (expense) recovery $ (238) $ 743

Theincometaxexpensediffersfromtheamountthatwouldhaveresultedfromapplyingthestatutoryincometaxratetoincomebeforeincometaxexpenseasfollows:


Incomebeforeincometaxes $ 405 $ 1,286Statutoryincometaxratebasedoncombinedfederalandprovincialrates 26.78% 26.60%Income tax expense based on statutory tax rates (108) (342)Effectsof:

Non-taxable(non-deductible)portionofcapitalgains(losses) (55) 52Unrecognizeddeferredincometaxassetsoncapitallosses (55) -Non-deductibleexpenses (21) (24)Taxratechangesondeferredincometaxes 2 (9)Recognitionofpreviouslyunrecognizeddeferredincometaxassets - 1,062Other (1) 4

Income tax (expense) recovery $ (238) $ 743

Theapplicablestatutorytaxrateis26.78%(2017–26.60%).TheCorporation’sapplicabletaxrateistheCanadiancombinedratesapplicableinthejurisdictionsinwhichtheCorporationoperates.TheincreasetothestatutorytaxrateismainlyduetothenetresultofcorporateincometaxratedecreasesinQuebecandtheYukon,andanincreaseinSaskatchewan,aswellaschangesinthelevelofactivitybyprovince.

Incometaxrecordedintheconsolidatedstatementofcomprehensiveincomeispresentedbelow.

2018 2017

Remeasurementsonemployeebenefitliabilities-deferredincometax $ (188) $ (322)Income tax expense $ (188) $ (322)

Theincometaxexpensediffersfromtheamountthatwouldhaveresultedfromapplyingthestatutoryincometaxratetoothercomprehensiveincomebeforeincometaxexpenseasfollows:

2018 ANNUAL REPORT


2018 2017

Othercomprehensiveincomebeforeincometaxes $ 691 $ 508Statutoryincometaxratebasedoncombinedfederalandprovincialrates 26.78% 26.60%Income tax expense based on statutory tax rates (185) (135)Effectsof:

Recognitionofpreviouslyunrecognizeddeferredincometaxliability - (184)Other (3) (3)

Income tax expense $ (188) $ (322)

Incometaxrecordedinshareholders’equityispresentedbelow.

2018 2017

Share-basedcompensation $ - $ 19Income tax recovery $ - $ 19

Deferred Income Tax

Deferredincometaxassetsarerecognizedonlytotheextentthatitisprobablethatfuturetaxableincomewillbeavailabletorealizethem.Inmakingthisassessment,considerationisgiventoavailablepositiveandnegativeevidenceandrelevantassumptions,including,historicalfinancialresults,andexpectationsrelatingtofuturetaxableincome,theoverallbusinessenvironment,andindustry-widetrends.

During2017,AirCanadadeterminedthatitwasprobablethatsubstantiallyallofthedeferredincometaxassets,whichincludenon-capitallosses,wouldberealized.

Deferredtaxassetsandliabilitiesof$39arerecordednetasanoncurrentdeferredincometaxassetanddeferredtaxliabilitiesof$52arerecordedasanoncurrentdeferredincometaxliabilityontheconsolidatedstatementoffinancialposition.Certainintangibleassetswithnominaltaxcostandacarryingvalueof$185haveindefinitelivesandaccordingly,theassociateddeferredincometaxliabilityof$49(2017-$49)isnotexpectedtoreverseuntiltheassetsaredisposedof,becomeimpairedoramortizableandasaresultisincludedaspartofthenoncurrentdeferredincometaxliability.

Thesignificantcomponentsofdeferredincometaxassetsandliabilitieswereasfollows:


Deferred income tax assetsNon-capitallosses $ 353 $ 649Post-employmentobligations 171 286Accountingprovisionsnotcurrentlydeductiblefortax 67 61Investmenttaxcreditsandrecoverabletaxes 37 31Other 28 34

656 1,061Deferred income tax liabilitiesProperty,equipmentandtechnology-basedintangibles (555) (554)Indefinite-livedintangibleassets (49) (49)Other (65) (51)

(669) (654)Net recognized deferred income tax assets (liabilities) (13) 407

Balance sheet presentationDeferredincometaxassets 39 456Deferredincometaxliabilities (52) (49)Net recognized deferred income tax assets (liabilities) (13) 407

2018 ANNUAL REPORT


Thefollowingtablepresentsthevariationofthecomponentsofdeferredincometaxbalances:

January 1, 2018

Restated-Note2

2018 income statement movement

2018 OCI movement

December 31, 2018

Non-capitallosses $ 649 $ (296) $ - $ 353Post-employmentobligations 286 73 (188) 171

Accountingprovisionsnotcurrentlydeductiblefortax

61 6 - 67

Investmenttaxcreditsandrecoverabletaxes

31 6 - 37

Otherdeferredtaxassets 34 (6) - 28

Property,equipmentandtechnology-basedintangibles

(554) (1) - (555)

Indefinite-livedintangibleassets (49) - - (49)Otherdeferredtaxliabilities (51) (14) - (65)

Total recognized deferred income tax assets (liabilities)

$ 407 $ (232) $ (188) $ (13)

AtDecember31,2018,theCorporationhasdeductibletemporarydifferencesofacapitalnatureforwhichnodeferredincometaxassethasbeenrecognizedatthistimeastheabilitytoutilizethesetaxattributesislimitedtofuturetaxablecapitalgains.Netcapitallossesdonothaveanexpirydate.

Thefollowingarethetemporarydifferencesandtaxlosscarryforwardsforwhichnodeferredincometaxassetscouldberecognized:

2018 2017

Unrealizedforeignexchangelosses $ 230 $ 62Unrecognizednetcapitallossescarryforwards 84 40Total unrecognized net temporary differences $ 314 $ 102Deferredincometaxratebasedoncombinedfederalandprovincialrates 26.75% 26.79%Total unrecognized net deferred income tax assets 84 27

ThefollowingaretheFederalnon-capitaltaxlossesexpirydates:

Tax Losses

2029 $ 362030 392031 62032 4892033 4032034 32035 2442036 32037 22038 2Non-capital losses carryforwards $ 1,227

Cashincometaxespaidin2018bytheCorporationwere$32(2017–$1).

2018 ANNUAL REPORT


11. SHARE CAPITAL

Number of shares

Value

At January 1, 2017 273,212,802 $ 797Sharesissuedontheexerciseofstockoptions 3,906,662 14Sharespurchasedandcancelledunderissuerbid (4,042,818) (12)At December 31, 2017 273,076,646 $ 799Sharesissuedontheexerciseofstockoptions 667,087 8Sharespurchasedandcancelledunderissuerbid (3,013,822) (9)At December 31, 2018 270,729,911 $ 798

TheissuedandoutstandingsharesofAirCanada,alongwiththepotentialshares,wereasfollows:

2018 2017

Issued and outstandingClassAvariablevotingshares 125,214,350 115,986,084ClassBvotingshares 145,515,561 157,090,562Total issued and outstanding 270,729,911 273,076,646

Potential sharesStockoptions Note12 6,014,464 6,121,252Total outstanding and potentially issuable shares 276,744,375 279,197,898

Shares

AsatDecember31,2018,thesharesissuablebyAirCanadaconsistofanunlimitednumberofClassAVariableVotingShares(“VariableVotingShares”)andanunlimitednumberofClassBVotingShares(“VotingShares”).Thetwoclassesofshareshaveequivalentrightsasshareholdersexceptforvotingrights.HoldersofVariableVotingSharesareentitledtoonevotepershareunless(i)thenumberofVariableVotingSharesoutstanding,asapercentageofthetotalnumberofvotingsharesofAirCanadaexceeds25%or(ii)thetotalnumberofvotescastbyoronbehalfofholdersofVariableVotingSharesatanymeetingexceeds25%ofthetotalnumberofvotesthatmaybecastatsuchmeeting.Ifeitheroftheabovenotedthresholdswouldotherwisebesurpassedatanytime,thevoteattachedtoeachVariableVotingSharewilldecreaseproportionatelysuchthat(i)theVariableVotingSharesasaclassdonotcarrymorethan25%oftheaggregatevotesattachedtoallissuedandoutstandingVotingSharesofAirCanadaand(ii)thetotalnumberofvotescastbyoronbehalfofholdersofVariableVotingSharesatanymeetingdonotexceed25%ofthevotesthatmaybecastatsuchmeeting.

VariableVotingSharesmayonlybeheld,beneficiallyownedorcontrolled,directlyorindirectly,bypersonswhoarenotCanadians(withinthemeaningoftheCanada Transportation Act).AnissuedandoutstandingVariableVotingShareisconvertedintooneVotingShareautomaticallyandwithoutanyfurtheractofAirCanadaortheholder,ifsuchVariableVotingSharebecomesheld,beneficiallyownedandcontrolled,directlyorindirectly,otherwisethanbywayofsecurityonly,byaCanadian,asdefinedintheCanada Transportation Act.

VotingSharesmayonlybeheld,beneficiallyownedandcontrolled,directlyorindirectly,byCanadians.AnissuedandoutstandingVotingShareisconvertedintooneVariableVotingShareautomaticallyandwithoutanyfurtheractofAirCanadaortheholder,ifsuchVotingSharebecomesheld,beneficiallyownedorcontrolled,directlyorindirectly,otherwisethanbywayofsecurityonly,byapersonwhoisnotaCanadian.

2018 ANNUAL REPORT


Shareholder Rights Plan

Underthetermsoftheshareholderrightsplanagreement(the“RightsPlan”),effectiveuntilthedayafterAirCanada’s2020annualmeetingofshareholders,oneright(a“Right”)isissuedwithrespecttoeachshareofAirCanadaissuedandoutstanding.TheseRightswouldbecomeexercisableonlywhenaperson,includinganypartyrelatedtoit,acquiresorannouncesitsintentiontoacquire20%ormoreoftheoutstandingsharesofAirCanadacalculatedonacombinedbasis,withoutcomplyingwiththe“PermittedBid”provisionsoftheRightsPlanor,incertaincases,withouttheapprovaloftheBoard.Untilsuchtime,theRightsarenotseparablefromtheshares,arenotexercisableandnoseparaterightscertificatesareissued.Toqualifyasa“PermittedBid”undertheRightsPlan,abidmust,amongotherthings:(i)bemadetoallholdersofshares,(ii)remainopenforaperiodofnotlessthan105days(orsuchshorterminimumperioddeterminedinaccordancewithNationalInstrument62-104-Take-Over Bids and Issuer Bids(“NI62-104”),(iii)providethatnosharesshallbetakenupunlessmorethan50%ofthethenoutstandingshares,otherthanthesharesheldbythepersonpursuingtheacquisitionandpartiesrelatedtoit,havebeentenderedandnotwithdrawn,and(iv)providethatifsuch50%conditionissatisfied,thebidwillbeextendedforatleast10daystoallowothershareholderstotender.

FollowingtheoccurrenceofaneventwhichtriggerstherighttoexercisetheRightsandsubjecttothetermsandconditionsoftheRightsPlan,eachRightwouldentitletheholdersthereof,otherthantheacquiringpersonoranyrelatedpersons,toexercisetheirRightsandpurchasefromAirCanadatwohundreddollars’worthofsharesforonehundreddollars(i.e.ata50%discounttothemarketpriceatthattime).Uponsuchexercise,holdersofrightsbeneficiallyownedandcontrolledbyQualifiedCanadianswouldreceiveClassBVotingSharesandholdersofrightsbeneficiallyownedorcontrolledbypersonswhoarenotQualifiedCanadianswouldreceiveClassAVariableVotingShares.

Issuer Bid

InMay2017,AirCanadareceivedapprovalfromtheTorontoStockExchange(“TSX”)fortherenewalofitsnormalcourseissuerbid,authorizing,betweenMay31,2017andMay30,2018,thepurchaseofupto22,364,183shares,representing10%ofthepublicfloatasatMay17,2017.Therenewalfollowedtheconclusionofthe2016normalcourseissuerbidwhichexpiredonMay29,2017.

In2017,theCorporationpurchased,forcancellation,4,042,818sharesatanaveragecostof$17.49pershareforaggregateconsiderationof$71.Theexcessofthecostovertheaveragebookvalueof$59waschargedtoRetainedearnings.

InMay2018,AirCanadareceivedapprovalfromtheTSXfortherenewalofitsnormalcourseissuerbid,authorizing,betweenMay31,2018andMay30,2019,thepurchaseofupto24,040,243shares,representing10%ofAirCanada’spublicfloatasatMay17,2018.Therenewalfollowedtheconclusionofthe2017normalcourseissuerbidwhichexpiredonMay30,2018.

In2018,theCorporationpurchased,forcancellation,3,013,822sharesatanaveragecostof$24.11pershareforaggregateconsiderationof$73.Theexcessofthecostovertheaveragebookvalueof$64waschargedtoRetainedearnings.AtDecember31,2018,atotalof21,940,639sharesremainavailableforrepurchaseundertheexistingissuerbid.

2018 ANNUAL REPORT


12. SHARE-BASED COMPENSATION

Air Canada Long-Term Incentive Plan

CertainoftheCorporation’semployeesparticipateintheAirCanadaLong-termIncentivePlan(the“Long-termIncentivePlan”).TheLong-termIncentivePlanprovidesforthegrantofstockoptions,performanceshareunitsandrestrictedshareunitstoseniormanagementandofficersofAirCanada.Withrespecttothestockoptions,19,381,792shareswereinitiallyauthorizedforissuanceundertheLong-termIncentivePlanofwhich9,046,974remainavailableforfutureissuance.Theoutstandingperformanceshareunitsandrestrictedshareunitswillnotresultintheissuanceofnewsharesastheseshareunitswillberedeemedforsharespurchasedonthesecondarymarket(andnotissuedfromtreasury)and/orequivalentcash,atthediscretionoftheCorporation.

Stock Options

TheoptionstopurchasesharesgrantedundertheLong-termIncentivePlanhaveamaximumtermofsevenyearsandanexercisepricebasedonthefairmarketvalueofthesharesatthetimeofthegrantoftheoptions.Fiftypercentofoptionsaretime-basedandvestoverfouryears.Theremainingoptionsvestbaseduponperformanceconditions,whicharebasedonoperatingmargin(operatingincomeoveroperatingrevenues)targetsestablishedbytheAirCanadaBoardoverthesametimeperiod.Eachoptionentitlestheemployeetopurchaseoneshareatthestatedexerciseprice.TheLong-termIncentivePlanspecifiesthatfollowingretirementanemployeemayexerciseoptionsgrantedwiththerightstoexercisecontinuingforthethreeyearsaftertheretirementdate.

ThenumberofAirCanadastockoptionsgrantedtoemployees,therelatedcompensationexpenserecordedandtheassumptionsusedtodeterminestock-basedcompensationexpense,usingtheBlack-Scholesoptionvaluationmodelareasfollows:

2018 2017

Compensationexpense($millions) $ 9 $ 6NumberofstockoptionsgrantedtoAirCanadaemployees 1,293,091 1,219,976Weightedaveragefairvalueperoptiongranted($) $ 9.27 $ 6.14Aggregatedfairvalueofoptionsgranted($millions) $ 12 $ 7Weightedaverageassumptions:

Shareprice $ 26.28 $ 14.85Risk-freeinterestrate 1.95%-2.48% 0.86%-1.89%Expectedvolatility 38.2% 39.6%-49.3%Dividendyield 0% 0%Expectedoptionlife(years) 5.25 5.25

Expectedvolatilitywasdeterminedatthetimeofgrantusingthesharepriceonahistoricalbasis.Itreflectstheassumptionthatthehistoricalvolatilityisindicativeoffuturetrends,whichmaynotnecessarilybetheactualoutcome.


2018 ANNUAL REPORT

AsummaryoftheLong-termIncentivePlanoptionactivityisasfollows:

2018 2017

Options Weighted Average

Exercise Price/Share

Options WeightedAverage

ExercisePrice/Share

Beginningofyear 6,121,252 $ 8.46 8,985,958 $ 4.92Granted 1,293,091 26.28 1,219,976 14.73Exercised (667,087) 7.90 (3,906,662) 2.30Expiredorcancelled - - (35,148) 4.89Forfeited (732,792) 16.32 (142,872) 8.36Outstanding options, end of year 6,014,464 $ 11.40 6,121,252 $ 8.46Options exercisable, end of year 2,800,327 $ 5.18 2,348,815 $ 4.29

Theweightedaveragesharepriceonthedateofexerciseforoptionsexercisedin2018was$26.59(2017-$19.77).

2018 Outstanding Options 2018 Exercisable Options

Range of Exercise Prices

Expiry Dates

Number of Options

Outstanding

Weighted Average

Remaining Life (Years)

Weighted Average


Number of Exercisable

Options

Weighted Average


$0.96 2019 22,952 1 $ 0.96 22,952 $ 0.96$2.49–$5.69 2020 1,603,605 2 2.88 1,603,605 2.88$5.35–$8.27 2021 578,680 3 5.39 578,680 5.39

$12.27–$12.64 2022 583,830 4 12.64 193,481 12.64$9.23–$9.61 2023 1,186,834 5 9.26 283,691 9.26

$12.83–$26.40 2024 954,568 6 14.39 117,919 14.26$22.53–$27.75 2025 1,083,995 7 26.49 - -

6,014,464 $ 11.40 2,800,328 $ 5.18

2017OutstandingOptions 2017ExercisableOptions

RangeofExercisePrices

ExpiryDates

NumberofOptions

Outstanding

WeightedAverage

RemainingLife(Years)

WeightedAverage

ExercisePrice/Share

NumberofExercisable

Options

WeightedAverage

ExercisePrice/Share

$0.96 2019 40,604 2 $ 0.96 40,604 $ 0.96$2.49–$5.69 2020 1,711,049 3 2.89 1,711,049 2.89$5.35–$8.27 2021 818,126 4 5.43 257,165 5.44

$12.27–$12.64 2022 852,965 5 12.56 157,649 12.64$9.23–$9.61 2023 1,481,246 6 9.27 182,348 9.27

$12.83–$26.40 2024 1,217,262 7 14.74 - -6,121,252 $ 8.46 2,348,815 $ 4.29

2018 ANNUAL REPORT


Performance and Restricted Share Units

TheLong-termIncentivePlanalsoincludesperformanceshareunits(“PSUs”)andrestrictedshareunits(“RSUs”).ThevestingofPSUsisbasedontheCorporationachievingitscumulativeannualearningstargetoverathree-yearperiod,whileRSUswillvestafterthreeyearsfromtheirdateofgrant.Thetermsoftheplanspecifythatupontheretirementofanemployee,thenumberofunitsthatvestareproratedbasedonthetotalnumberofcompletedmonthsofactiveserviceduringthevestingterm.ThePSUsandRSUsgrantedmayonlyberedeemedforAirCanadasharespurchasedonthesecondarymarketand/orequivalentcashatthediscretionoftheBoardofDirectors.

ThecompensationexpenserelatedtoPSUsandRSUsin2018was$21(2017–$33).

AsummaryoftheLong-termIncentivePlanshareunitactivityisasfollows:

2018 2017

Beginningofyear 2,706,261 3,052,028Granted 772,536 922,716Settled (694,111) (1,098,067)Forfeited (283,922) (170,416)Outstanding share units, end of year 2,500,764 2,706,261

RefertoNote15foradescriptionofderivativeinstrumentsusedbytheCorporationtomitigatethecashflowexposuretothePSUsandRSUsgranted.

Employee Share Purchase Plan

Eligibleemployeescanparticipateintheemployeesharepurchaseplanunderwhichemployeescaninvestbetween2%and10%oftheirbasesalaryforthepurchaseofsharesonthesecondarymarket.For2018contributions,AirCanadawillmatch33.33%ofthecontributionsmadebyemployees.During2018,theCorporationrecordedcompensationexpenseof$12(2017–$8)relatedtotheEmployeesharePurchasePlan.

2018 ANNUAL REPORT


13. EARNINGS PER SHARE

Thefollowingtableoutlinesthecalculationofbasicanddilutedearningspershare:

(inmillions,exceptpershareamounts)2018 2017

Restated-Note2

Numerator:Numerator for basic and diluted earnings per share:

Netincome $ 167 $ 2,029Denominator:Weighted-average shares 272 273

Effectofpotentialdilutivesecurities:Stockoptions 4 5

Totalpotentialdilutivesecurities 4 5Adjusted denominator for diluted earnings per share 276 278Basic earnings per share $ 0.61 $ 7.44Diluted earnings per share $ 0.60 $ 7.31

Thecalculationofearningspershareisbasedonwholedollarsandnotonroundedmillions.Asaresult,theaboveamountsmaynotberecalculatedtothepershareamountdisclosedabove.

Excludedfromthe2018calculationofdilutedearningspersharewere749,000(2017–101,000)outstandingoptionswheretheoptions’exercisepricesweregreaterthantheaveragemarketpriceofthesharesfortheyear.

2018 ANNUAL REPORT


14. COMMITMENTS

Capital Commitments and Operating Leases

Capitalcommitmentsconsistofthefuturefirmaircraftdeliveriesandcommitmentsrelatedtotheacquisitionofotherpropertyandequipment.Theestimatedaggregatecostofaircraftisbasedondeliverypricesthatincludeestimatedescalationand,whereapplicable,deferredpricedeliverypaymentinterestcalculatedbasedonthe90-dayU.S.LIBORrateatDecember31,2018.TheCorporationhasvariousoperatingleaseagreementsforaircraft,equipmentandotherproperty.U.S.dollaramountsareconvertedusingtheDecember31,2018closingrateofCDN$1.3637.Minimumfuturecommitmentsunderthesecontractualarrangementsareshownbelow.


Capitalcommitments $ 2,382 $ 1,556 $ 815 $ 753 $ 375 $ 195 $ 6,076Operatingleases

Aircraft 561 435 316 243 194 625 2,374Otherproperty 118 92 67 51 36 243 607

Total $ 3,061 $ 2,083 $ 1,198 $ 1,047 $ 605 $ 1,063 $ 9,057

TheCorporationleasesandsubleasescertainaircraftandspareenginestoJazz,SkyRegionalandAirGeorgian,whicharechargedbacktoAirCanadathroughtheirrespectiveCPAs.Thesearereportednetontheconsolidatedstatementofoperations.TheleasesandsubleasesrelatetofiveBombardierQ400aircraft,12CRJ-200aircraft,25Embraer175aircraft,and16spareengines.Theleaseandsubleaserevenueandexpenserelatedtotheseaircraftandengineseachamountto$95in2018(2017–$92).

Flow-through Leases

Foraccountingpurposes,theCorporationactsasanagentandsubleasescertainaircrafttoJazzonaflow-throughbasis,whicharereportednetontheconsolidatedstatementofoperations.ThesubleaseswithJazzhavethesametermsandmaturityastheCorporation’scorrespondingleasecommitmentstothelessors.ThesesubleasesrelatetofiveBombardierQ400aircraft,tenBombardierCRJ-200aircraft,andfifteenBombardierCRJ-705aircraftwhichhavefinalmaturitiesrangingfrom2021to2025.Thesubleaserevenueandleaseexpenserelatedtotheseaircrafteachamountedto$77in2018(2017–$81).Theoperatingleasecommitmentsundertheseaircraft,whicharerecoveredfromJazz,arenotincludedintheaircraftoperatingleasecommitmentstableabovebutaresummarized,withU.S.dollaramountsconvertedusingtheDecember31,2018closingrateofCDN$1.3637,asfollows:


Jazzflow-throughleases $ 81 $ 81 $ 72 $ 56 $ 47 $ 22 $ 359

Other Contractual Commitments

Thefutureminimumnon-cancellablecommitmentforthenext12monthsundertheJazzCPAisapproximately$1,218andunderthecapacitypurchaseagreementswithotherregionalcarriersis$284.AsfurtherdiscussedinNote23,theCorporationconcludedanagreementtoamendandextenditsCPAwithJazzinFebruary2019.

2018 ANNUAL REPORT


15. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Summary of Financial Instruments

Carrying Amounts

December 31, 2018December31,

2017Financial instruments classification

Fair value through profit

and loss

Assets at amortized

cost

Liabilities at amortized

cost

Total

Financial AssetsCashandcashequivalents $ 630 $ - $ - $ 630 $ 642Short–terminvestments 4,077 - - 4,077 3,162Restrictedcash 161 - - 161 148Accountsreceivable - 796 - 796 814Prepaidexpensesandothercurrentassets

Collateralonaircraftfinancing - - - - 24Depositsandotherassets

Restrictedcash 171 - - 171 186Aircraftrelatedandotherdeposits - 135 - 135 128

DerivativeinstrumentsShareforwardcontracts 43 - - 43 54Foreignexchangederivatives 24 - - 24 -

$ 5,106 $ 931 $ - $ 6,037 $ 5,158

Financial LiabilitiesAccountspayable $ - $ - $ 1,793 $ 1,793 $ 1,668Foreignexchangederivatives 57 - - 57 215

Currentportionoflong–termdebtandfinanceleases

- - 455 455 671

Long–termdebtandfinanceleases - - 6,197 6,197 5,448$ 57 $ - $ 8,445 $ 8,502 $ 8,002

Summary of Gain (Loss) on Financial Instruments Recorded at Fair Value

2018 2017

Shareforwardcontracts $ - $ 26Fuelderivatives (1) (3)Gain (loss) on financial instruments recorded at fair value $ (1) $ 23

2018 ANNUAL REPORT


Risk Management

Underitsriskmanagementpolicy,theCorporationmanagesitsmarketriskthroughtheuseofvariousfinancialderivativeinstruments.TheCorporationusestheseinstrumentssolelyforriskmanagementpurposes,notforgeneratingtradingprofit.Assuch,anychangeincashflowsassociatedwithderivativeinstrumentsisdesignedtobeaneconomichedgeandoffsetbychangesincashflowsoftherelevantriskbeinghedged.

Thefairvaluesofderivativeinstrumentsrepresenttheamountoftheconsiderationthatcouldbeexchangedinanarm’slengthtransactionbetweenwillingpartieswhoareundernocompulsiontoact.Thefairvalueofthesederivativesisdeterminedusingpricesinactivemarkets,whereavailable.Whennosuchmarketisavailable,valuationtechniquessuchasdiscountedcashflowanalysisareapplied.Thevaluationtechniqueincorporatesallfactorsthatwouldbeconsideredinsettingaprice,includingtheCorporation’sowncreditriskaswellasthecreditriskofthecounterparty.

MarketRisks

Marketriskistheriskthatthefairvalueorfuturecashflowsofafinancialinstrumentwillfluctuateduetochangesinmarketprices.Marketriskcanbefurtherdividedintothefollowingsub-classificationsrelatedtotheCorporation:fuelpricerisk,foreignexchangerisk,interestraterisk,andshare-basedcompensationrisk.

FuelPriceRisk

Fuelpriceriskistheriskthatfuturecashflowswillfluctuatebecauseofchangesinjetfuelprices.Inordertomanageitsexposuretojetfuelpricesandtohelpmitigatevolatilityinoperatingcashflows,theCorporationentersintoderivativecontractswithfinancialintermediaries.TheCorporationmayusederivativecontractsbasedonjetfuel,heatingoilandcrude-oilbasedcontracts.TheCorporation’spolicypermitshedgingofupto75%oftheprojectedjetfuelpurchasesforthecurrentcalendaryear,50%oftheprojectedjetfuelpurchasesforthenextcalendaryear,and25%ofprojectedjetfuelpurchasesforanycalendaryearthereafter.Thesearemaximum(butnotmandated)limits.Thereisnominimummonthlyhedgingrequirement.Thereareregularreviewstoadjustthestrategyinlightofmarketconditions.

During2018:

> Hedginglossesonthesettlementoffuelderivativesof$19andtheassociatedpremiumcostsof$17,forahedginglossof$36werereclassifiedfromothercomprehensiveincometoAircraftfuelexpense(netfuelhedginglossof$2wasreclassifiedfromothercomprehensiveincometoAircraftfuelexpensein2017).Nohedgeineffectivenesswasrecorded.

> TheCorporationpurchasedcrude-oilcalloptionsandswapscoveringaportionof2018fuelexposure.Thecashpremiumrelatedtothesecontractswas$17($18in2017for2017exposures).

> Fuelderivativecontractscashsettledwithafairvalueof$19infavourofthecounterparties($26infavouroftheCorporationin2017).

TherewerenooutstandingfuelderivativesasatDecember31,2018andDecember31,2017.

ForeignExchangeRisk

TheCorporation’sfinancialresultsarereportedinCanadiandollars,whilealargeportionofitsexpenses,debtobligationsandcapitalcommitmentsareinforeigncurrencies,primarilyinU.S.dollars.Foreignexchangeriskistheriskthatfluctuationsinforeignexchangeratesmayhaveonoperatingresultsandcashflows.TheCorporation’sriskmanagementobjectiveistoreducecashflowriskrelatedtoforeigndenominatedcashflows.

AirCanadageneratescertainsalesinU.S.dollarsandinotherforeigncurrencieswhichareconvertedtoU.S.dollarsundertheCorporation’sriskmanagementprogram.In2018,thesenetoperatingcashinflowstotaledapproximatelyUS$4.2billionandU.S.denominatedoperatingcostsamountedtoapproximatelyUS$6.4billion.Non-operatingcashoutflowsinU.S.dollars,primarilyrelatedtointerestpaymentsonU.S.dollardenominateddebtandnetfinancingoutflows,amountedtoapproximatelyUS$1.9billion.For2018,thisresultedinaU.S.dollarnetcashflowexposureofapproximatelyUS$4.1billion.

2018 ANNUAL REPORT


TheCorporationhasatargetcoverageof70%onarolling18monthbasistomanagethenetU.S.dollarcashflowexposuredescribedaboveutilizingthefollowingriskmanagementstrategies:

> HoldingU.S.dollarcashreservesasaneconomichedgeagainstchangesinthevalueoftheU.S.dollar.U.S.dollarcashandshort-terminvestmentbalancesasatDecember31,2018amountedto$863(US$635)($686(US$542)asatDecember31,2017).Aportionofthecashandinvestmentreservesareaneconomichedgeagainstlong-termU.S.dollardebtwhiletheremainderofthecashisoperationalcashandinvestmentreserveswhichareappliedagainsttherolling18monthnetU.S.dollarcashflowexposure.In2018,againof$62(lossof$58in2017)wasrecordedinForeignexchangegain(loss)reflectingthechangeinCanadianequivalentmarketvalueoftheU.S.dollarcashandshort-terminvestmentbalancesheld.

> LockingintheforeignexchangeratethroughtheuseofavarietyofforeignexchangederivativeswhichhavematuritydatescorrespondingtotheforecasteddatesofU.S.dollarnetoutflows.

Thelevelofforeignexchangederivativesenteredintoandtheirrelatedmaturitydatesaredependentuponanumberoffactors,whichincludetheamountofforeignrevenueconversionavailable,U.S.dollarnetcashoutflows,aswellastheamountattributedtoaircraftanddebtpayments.BasedonthenotionalamountofcurrencyderivativesoutstandingatDecember31,2018,asfurtherdescribedbelow,approximately77%ofnetU.S.cashoutflowsarehedgedfor2019and48%for2020,resultinginderivativecoverageof68%overthenext18months.OperationalU.S.dollarcashandinvestmentreservescombinedwithderivativecoverageresultsin75%coverage.

AsatDecember31,2018,theCorporationhadoutstandingforeigncurrencyoptionsandswapagreements,settlingin2019and2020,topurchaseatmaturity$4,987(US$3,659)ofU.S.dollarsataweightedaveragerateof$1.2645perUS$1.00(2017–$3,400(US$2,704)withsettlementsin2018and2019ataweightedaveragerateof$1.2703per$1.00U.S.dollar).TheCorporationalsohasprotectioninplacetosellaportionofitsexcessEuros,Sterling,YEN,andAUD(EUR€103,GBP£208,JPY¥25,922,andAUD$105)whichsettlein2019and2020atweightedaverageratesof€1.1910,£1.3567,¥0.0092,andAUD$0.7448per$1.00U.S.dollar,respectively(asatDecember31,2017-EUR€101,GBP£105,JPY¥8,623,CNY¥41,andAUD$32withsettlementin2018atweightedaverageratesof€1.1664,£1.3259,¥0.0090,¥0.1468andAUD$0.7576respectivelyper$1.00U.S.dollar).

Thehedgingstructuresputinplacehavevariousoptionpricingfeatures,suchasknock-outtermsandprofitcaplimitations,andbasedontheassumedvolatilityusedinthefairvaluecalculation,thenetfairvalueoftheseforeigncurrencycontractsasatDecember31,2018was$33infavourofthecounterparties(2017–$215infavourofthecounterparties).Thesederivativeinstrumentshavenotbeendesignatedashedgesforaccountingpurposesandarerecordedatfairvalue.During2018,againof$245wasrecordedinForeignexchangegain(loss)relatedtothesederivatives(2017–$274loss).In2018,foreignexchangederivativecontractscashsettledwithanetfairvalueof$63infavouroftheCorporation(2017–$55infavourofthecounterparties).

InterestRateRisk

Interestrateriskistheriskthatthefairvalueorfuturecashflowsofafinancialinstrumentwillfluctuatebecauseofchangesinmarketinterestrates.

TheCorporationentersintobothfixedandfloatingratedebtandalsoleasescertainassetswheretherentalamountfluctuatesbasedonchangesinshortterminterestrates.TheCorporationmanagesinterestrateriskonaportfoliobasisandseeksfinancingtermsinindividualarrangementsthataremostadvantageoustakingintoaccountallrelevantfactors,includingcreditmargin,termandbasis.TheriskmanagementobjectiveistominimizethepotentialforchangesininterestratestocauseadversechangesincashflowstotheCorporation.Thecashandshort-terminvestmentportfoliowhichearnsafloatingrateofreturnisaneconomichedgeforaportionofthefloatingratedebt.

TheratiooffixedtofloatingrateobligationsoutstandingisdesignedtomaintainflexibilityintheCorporation’scapitalstructureandisbaseduponalongtermobjectiveof60%fixedand40%floatingbutallowsflexibilitytoadjusttoprevailingmarketconditions.TheratioatDecember31,2018is81%fixedand19%floating(73%and27%,respectivelyasatDecember31,2017).

2018 ANNUAL REPORT


Share-basedCompensationRisk

TheCorporationissuesRSUsandPSUstocertainofitsemployees,asdescribedinNote12,whichentitlestheemployeestoreceiveapaymentintheformofoneshare,cashintheamountequaltomarketvalueofoneshare,oracombinationthereof,atthediscretionoftheBoardofDirectors.

Tohedgethesharepriceexposure,theCorporationenteredintoshareforwardcontractstohedgePSUsandRSUsthatmayvestbetween2019and2021,subjecttothetermsofvestingincludingrealizationofperformancevestingcriteria.Theforwarddatesfortheshareforwardcontractscoincidewiththevestingtermsandplannedsettlementdatesof1,664,142PSUsandRSUsfrom2019to2021.Thesecontractswerenotdesignatedashedginginstrumentsforaccountingpurposes.Accordingly,changesinthefairvalueofthesecontractsarerecordedinGainonfinancialinstrumentsrecordedatfairvalueintheperiodinwhichtheyarise.During2018,againoflessthan$1wasrecorded(2017–gainof$26).Shareforwardcontractscashsettledwithafairvalueof$17infavouroftheCorporationin2018(2017–$12),withnewcontractpurchasesof$6for2021hedges.AsatDecember31,2018,thefairvalueoftheshareforwardcontractsis$43infavouroftheCorporation(2017–$54infavouroftheCorporation),withthosecontractsmaturingin2019valuedat$26recordedinPrepaidexpensesandothercurrentassetsandtheremainderof$17recordedinDepositsandotherassets.

Liquidityrisk

TheCorporationmanagesitsliquidityneedsthroughavarietyofstrategiesincludingbyseekingtosustainandimprovecashfromoperations,sourcingcommittedfinancingfornewandexistingaircraft,andthroughotherfinancingactivities.

Liquidityneedsareprimarilyrelatedtomeetingobligationsassociatedwithfinancialliabilities,capitalcommitments,ongoingoperations,contractualandotherobligations.TheCorporationmonitorsandmanagesliquidityriskbypreparingrollingcashflowforecasts,monitoringtheconditionandvalueofassetsavailabletobeusedaswellasthoseassetsbeingusedassecurityinfinancingarrangements,seekingflexibilityinfinancingarrangements,andestablishingprogramstomonitorandmaintaincompliancewithtermsoffinancingagreements.AtDecember31,2018,unrestrictedliquiditywas$5,725comprisedofCashandcashequivalentsandShort-terminvestmentsof$4,707andundrawnlinesofcreditof$1,018.AnotherimportantaspectofmanagingliquidityriskrelatestomanagingtheCorporation’sfinancialleverage.RefertoNote17CapitalDisclosuresforadiscussiononfinancialleveragetargets.

Cashandcashequivalentsinclude$39pertainingtoinvestmentswithoriginalmaturitiesofthreemonthsorlessatDecember31,2018($30asatDecember31,2017).

AmaturityanalysisoftheCorporation’sprincipalandinterestrepaymentrequirementsonlong-termdebtissetoutinNote7,andfixedoperatingcommitmentsandcapitalcommitmentsaresetoutinNote14.

CreditRisk

Creditriskistheriskoflossduetoacounterparty’sinabilitytomeetitsobligations.AsatDecember31,2018,theCorporation’screditriskexposureconsistsmainlyofthecarryingamountsofCashandcashequivalents,Short-terminvestments,Accountsreceivableandderivativeinstruments.CashandcashequivalentsandShort-terminvestmentsareinplacewithmajorfinancialinstitutions,variouslevelsofgovernmentinCanada,andmajorcorporations.Accountsreceivablearegenerallytheresultofsalesofpassengerticketstoindividuals,largelythroughtheuseofmajorcreditcards,throughgeographicallydispersedtravelagents,corporateoutlets,orotherairlines.Similarly,accountsreceivablerelatedtocargorevenuesrelatetoaccountsfromalargenumberofgeographicallydispersedcustomers.Creditratingguidelinesareusedindeterminingderivativecounterparties.Inordertomanageitsexposuretocreditriskandassesscreditquality,theCorporationreviewscounterpartycreditratingsonaregularbasisandsetscreditlimitswhendeemednecessary.

2018 ANNUAL REPORT


SensitivityAnalysis

ThefollowingtableisasensitivityanalysisforeachtypeofmarketriskrelevanttothesignificantfinancialinstrumentsrecordedbytheCorporationasatDecember31,2018.Thesensitivityanalysisisbasedoncertainmovementsintherelevantriskfactor.Theseassumptionsmaynotberepresentativeofactualmovementsintheserisksandmaynotbereliedupon.Givenpotentialvolatilityinthefinancialandcommoditymarkets,theactualmovementsandrelatedpercentagechangesmaydiffersignificantlyfromthoseoutlinedbelow.Changesinincomegenerallycannotbeextrapolatedbecausetherelationshipofthechangeinassumptiontothechangeinincomemaynotbelinear.Eachriskiscontemplatedindependentofotherrisks;however,changesinonefactormayresultinchangesinoneormoreseveralotherfactors,whichmaymagnifyorcounteractthesensitivities.

ThesensitivityanalysisrelatedtoderivativecontractsisbasedontheestimatedfairvaluechangeapplicabletothederivativeasatDecember31,2018consideringanumberofvariablesincludingtheremainingtermtomaturityanddoesnotconsiderthefairvaluechangethatwouldbeapplicabletothederivativeassumingthemarketriskchangewasapplicabletothematuritydateofthederivativecontract.

Interest rate risk Foreign exchange rate risk (1)

Other price risk (2)

Income Income Income1%

increase1%

decrease5%

increase5%

decrease10%

increase10%

decrease

Cashandcashequivalents $ 6 $ (6) $ (10) $ 10 $ - $ -Short–terminvestments $ 41 $ (41) $ (33) $ 33 $ - $ -Aircraftrelateddeposits $ - $ - $ (5) $ 5 $ - $ -Long-termdebtandfinanceleases $ (18) $ 18 $ 297 $ (297) $ - $ -Shareforwardcontracts $ - $ - $ - $ - $ 4 $ (4)Foreignexchangederivatives $ - $ - $ (240) $ 234 $ - $ -

(1) Increase(decrease)inforeignexchangerelatestoastrengthening(weakening)oftheCanadiandollarversustheU.S.dollar.Theimpactonlong-termdebtandfinanceleasesincludes$9relatedtotheCanadiandollarversustheJapaneseyen.TheimpactofchangesinothercurrenciesisnotsignificanttotheCorporation’sfinancialinstruments.

(2)Thesensitivityanalysisforshareforwardcontractsisbasedupona10%increaseordecreaseintheAirCanadashareprice.

CovenantsinCreditCardAgreements

TheCorporation’sprincipalcreditcardprocessingagreementsforcreditcardprocessingservicescontaintriggeringeventsuponwhichtheCorporationisrequiredtoprovidetheapplicablecreditcardprocessorwithcashdeposits.Theobligationstoprovidecashdepositsandtherequiredamountofdepositsareeachbaseduponamatrixmeasuring,onaquarterlybasis,bothafixedchargecoverageratiofortheCorporationandtheunrestrictedcashandshort-terminvestmentsoftheCorporation.In2018,theCorporationmadenocashdepositsundertheseagreements(nilin2017).

2018 ANNUAL REPORT


Financial Instrument Fair Values in the Consolidated Statement of Financial Position

Thecarryingamountsreportedintheconsolidatedstatementoffinancialpositionforshorttermfinancialassetsandliabilities,whichincludesAccountsreceivableandAccountspayableandaccruedliabilities,approximatefairvaluesduetotheimmediateorshort-termmaturitiesofthesefinancialinstruments.CashequivalentsandShort-terminvestmentsareclassifiedasheldfortradingandthereforearerecordedatfairvalue.

Thecarryingamountsofderivativesareequaltofairvalue,whichisbasedontheamountatwhichtheycouldbesettledbasedonestimatedcurrentmarketrates.

Managementestimatedthefairvalueofitslong-termdebtbasedonvaluationtechniquesincludingdiscountedcashflows,takingintoaccountmarketinformationandtradedvalueswhereavailable,marketratesofinterest,theconditionofanyrelatedcollateral,thecurrentconditionsincreditmarketsandthecurrentestimatedcreditmarginsapplicabletotheCorporationbasedonrecenttransactions.Basedonsignificantunobservableinputs(Level3inthefairvaluehierarchy),theestimatedfairvalueofdebtandfinanceleasesapproximatesitscarryingvalue.

Followingisaclassificationoffairvaluemeasurementsrecognizedintheconsolidatedstatementoffinancialpositionusingafairvaluehierarchythatreflectsthesignificanceoftheinputsusedinmakingthemeasurements.

December 31, 2018

Fair value measurements at reporting date using:

Quoted prices in active

markets for identical assets

Significant other

observable inputs

Significant unobservable

inputs

Recurring measurements (Level1) (Level2) (Level3)

Financial AssetsHeld–for–tradingsecurities

Cashequivalents $ 39 $ - $ 39 $ -Short–terminvestments 4,077 - 4,077 -

DerivativeinstrumentsShareforwardcontracts 43 - 43 -Foreignexchangederivatives 24 - 24 -

Total $ 4,183 $ - $ 4,183 $ -

Financial LiabilitiesDerivativeinstruments

Foreignexchangederivatives 57 - 57 -Total $ 57 $ - $ 57 $ -

Financialassetsheldbyfinancialinstitutionsintheformofcashandrestrictedcashhavebeenexcludedfromthefairvaluemeasurementclassificationtableaboveastheyarenotvaluedusingavaluationtechnique.

TheCorporation’spolicyistorecognizetransfersintoandtransfersoutoffairvaluehierarchylevelsasofthedateoftheeventorchangeincircumstancesthatcausedthetransfer.Therewerenotransferswithinthefairvaluehierarchyduring2018.

2018 ANNUAL REPORT


Offsetting of Financial Instruments in the Consolidated Statement of Financial Position

FinancialassetsandliabilitiesareoffsetandthenetamountreportedintheconsolidatedstatementoffinancialpositionwheretheCorporationhasalegallyenforceablerighttoset-offtherecognizedamountsandthereisanintentiontosettleonanetbasisorrealizetheassetandsettletheliabilitysimultaneously.Inthenormalcourseofbusiness,theCorporationentersintovariousmasternettingarrangementsorothersimilararrangementsthatdonotmeetthecriteriaforoffsettingintheconsolidatedstatementoffinancialpositionbutstillallowfortherelatedamountstobeset-offincertaincircumstances,suchastheterminationofthecontractsorintheeventofbankruptcyordefaultofeitherpartytotheagreement.

AirCanadaparticipatesinindustryclearinghousearrangementswherebycertainaccountsreceivablebalancesrelatedtopassenger,cargoandotherbillingsaresettledonanetbasiswiththecounterpartythroughtheclearinghouse.Thesebillingsaremainlytheresultofinterlineagreementswithotherairlines,whicharecommercialagreementsthatenablethesaleandsettlementoftravelandrelatedservicesbetweenthecarriers.Billedandworkinprocessinterlinereceivablesarepresentedonagrossbasisandamountto$70asatDecember31,2018($75asatDecember31,2017).Thesebalanceswillbesettledatanetvalueatalaterdate;however,suchnetsettlementamountisunknownuntilthesettlementdate.

Thefollowingtablepresentstherecognizedfinancialinstrumentsthatareoffset,orsubjecttoenforceablemasternettingarrangementsorothersimilararrangementsbutnotoffset,asatDecember31,2018and2017,andshowsintheNetcolumnwhatthenetimpactwouldbeontheconsolidatedstatementoffinancialpositionifallset-offrightswereexercised.

Amounts offset Amounts not offset

Net

Grossassets

Grossliabilitiesoffset

Netamountspresented

Financialinstruments

Financial assets

December 31, 2018

Derivativeassets $ 93 $ (69) $ 24 $ 43 $ 67Accountsreceivable 113 (47) 66 - 66

$ 206 $ (116) $ 90 $ 43 $ 133

December 31, 2017

Derivativeassets $ - $ - $ - $ 54 $ 54Accountsreceivable 114 (48) 66 - 66

$ 114 $ (48) $ 66 $ 54 $ 120

Amounts offset Amounts not offset

Net

Grossliabilities

Grossassetsoffset

Netamountspresented

Financialinstruments

Financial liabilities

December 31, 2018

Derivativeliabilities $ 317 $ (260) $ 57 $ - $ 57$ 317 $ (260) $ 57 $ - $ 57

December 31, 2017

Derivativeliabilities $ 286 $ (71) $ 215 $ - $ 215$ 286 $ (71) $ 215 $ - $ 215

2018 ANNUAL REPORT


16. CONTINGENCIES, GUARANTEES AND INDEMNITIES

Contingencies and Litigation Provisions

InvestigationsbyCompetitionAuthoritiesRelatingtoCargo

TheEuropeanCommission,theUnitedStatesDepartmentofJusticeandtheCompetitionBureauinCanada,amongothersinvestigatedallegedanti-competitivecargopricingactivities,includingthelevyingofcertainfuelsurcharges,ofanumberofairlinesandcargooperators.TheinvestigationsconductedbytheU.S.DepartmentofJusticeandbytheCompetitionBureauinCanadaconcludedwithnoproceedingsagainstAirCanada.

Afterhavingrenderedadecisionagainstanumberofairlines,includingAirCanadain2010,whichwasoverturnedbytheEuropeanGeneralCourtinDecember2015,inMarch2017,theEuropeanCommissionrenderedanotherdecisionfindingthat12aircargocarriers,includingAirCanada,hadinfringedEuropeanUnioncompetitionlawinthesettingofcertaincargochargesandratesforvariousperiodsbetween1999and2006,imposingafineof21Euros(approximately$29)onAirCanada.AirCanadapaidthefineasrequiredinthesecondquarterof2017,pendingtheoutcomeofanappealtotheEuropeanGeneralCourt.WhileAirCanadacannotpredictwithcertaintytheoutcomeofitsappealoranyrelatedproceedings,AirCanadabelievesithasreasonablegroundstochallengetheEuropeanCommission’sruling.

AirCanadaisalsonamedasadefendantorisotherwiseinvolvedinanumberofclassactionlawsuitsandotherproceedingsinCanada,EuropeandtheUnitedStatesinconnectionwiththeseallegations.TheclassactionproceedingintheUnitedStatesweresettledbyAirCanadain2012,andcertainthird-partyproceedingsintheUnitedKingdomrelatingtothesameallegationsweresettledin2018.

AsatDecember31,2018,AirCanadahasaprovisionof$17($17asatDecember31,2017)relatingtooutstandingclaimsinthesematters,whichisrecordedinAccountspayableandaccruedliabilities.ThisprovisionisanestimatebaseduponthestatusofinvestigationsandproceedingsatthistimeandAirCanada’sassessmentastothepotentialoutcomeforcertainofthem.Theprovisiondoesnotaddresstheproceedingsandinvestigationsinalljurisdictions,butonlywherethereissufficientinformationtodoso.AirCanadahasdetermineditisnotpossibleatthistimetopredictwithanydegreeofcertaintytheoutcomeofallremainingproceedingsandinvestigations.Basedontheoutcomeofanydevelopmentsregardingproceedingsandinvestigations,AirCanadamayadjusttheprovisioninitsresultsforsubsequentperiodsasrequired.

MandatoryRetirement

AirCanadaisengagedinanumberofproceedingsinvolvingchallengestothemandatoryretirementprovisionsofcertainofitscollectiveagreements,includingthepreviousAirCanada-ACPAcollectiveagreement,whichincorporatedprovisionsofthepensionplantermsandconditionsapplicabletopilotsrequiringthemtoretireatage60.AirCanadahasfullyorpartiallyresolvedsomeofthesecomplaintsandisdefendingothers.Atthistime,itisnotpossibletodeterminewithanydegreeofcertaintytheextentofanyfinancialliabilitythatmayarisefromAirCanadabeingunsuccessfulinitsdefenceoftheseproceedings,thoughanysuchfinancialliability,ifimposed,wouldnotbeexpectedtobematerial.

OtherContingenciesVariousotherlawsuitsandclaims,includingclaimsfiledbyvariouslabourgroupsofAirCanadaarependingbyandagainsttheCorporationandprovisionshavebeenrecordedwhereappropriate.Itistheopinionofmanage-mentthatfinaldeterminationoftheseclaimswillnothaveamaterialadverseeffectonthefinancialpositionortheresultsoftheCorporation.

2018 ANNUAL REPORT


Guarantees

GuaranteesinFuelFacilitiesandDe-IcingArrangements

TheCorporationparticipatesinfuelfacilityarrangementsoperatedthrougheightFuelFacilityCorporations,andthreeaircraftde-icingservicefacilities,alongwithotherairlinesthatcontractforfuelandde-icingservicesatvariousmajorairportsinCanada.Theseentitiesoperateonacostrecoverybasis.TheaggregatedebtoftheseentitiesthathasnotbeenconsolidatedbytheCorporationunderIFRS10ConsolidatedFinancialStatementsisapproximately$571asatDecember31,2018(December31,2017-$529),whichistheCorporation’smaximumexposuretolossbeforetakingintoconsiderationthevalueoftheassetsthatsecuretheobligationsandanycostsharingthatwouldoccuramongsttheothercontractingairlines.TheCorporationviewsthislosspotentialasremote.Eachcontractingairlineparticipatingintheseentitiessharesprorata,basedonsystemusage,intheguaranteeofthisdebt.Thematuritiesofthesedebtarrangementsvarybutgenerallyextendbeyondfiveyears.

Indemnification Agreements

IntheordinarycourseoftheCorporation’sbusiness,theCorporationentersintoavarietyofagreements,suchasrealestateleasesoroperatingagreements,aircraftfinancingorleasingagreements,technicalserviceagreements,anddirector/officercontracts,andothercommercialagreements,someofwhichmayprovideforindemnificationstocounterpartiesthatmayrequiretheCorporationtopayforcostsand/orlossesincurredbysuchcounterparties.TheCorporationcannotreasonablyestimatethepotentialamount,ifany,itcouldberequiredtopayundersuchindemnifications.Suchamountwouldalsodependontheoutcomeoffutureeventsandconditions,whichcannotbepredicted.Whilecertainagreementsspecifyamaximumpotentialexposure,certainothersdonotspecifyamaximumamountoralimitedperiod.Historically,theCorporationhasnotmadeanysignificantpaymentsundertheseindemnifications.

TheCorporationexpectsthatitwouldbecoveredbyinsuranceformosttortliabilitiesandcertainrelatedcontractualindemnities.

2018 ANNUAL REPORT


17. CAPITAL DISCLOSURES

TheCorporationviewscapitalasthesumofLong-termdebtandfinanceleases,capitalizedoperatingleases,andthebookvalueofShareholders’equitylessexcesscashnotrequiredtorunitscorebusinessoperations.TheCorporationusesAdvanceticketsalesasaproxyfortheminimumcashrequiredforongoingcorebusinessoperations.Previously,theCorporationusedthemarketvalueofitsoutstandingsharesinthecalculationoftotalcapital.Followingasignificantincreaseinthebookvalueofitsequity,theCorporationdecidedtochangeitsmethodologytousebookvalue.TheCorporationincludescapitalizedoperatingleases,whichisameasurecommonlyusedintheindustryascribingavaluetoobligationsunderoperatingleases.Thevalueisbasedonannualizedaircraftrentexpense,includingaircraftrentexpenserelatedtoregionalcarrieroperations,multipliedby7.0,whichisafactorcommonlyusedintheairlineindustry.Themeasureusedmaynotnecessarilyreflectthefairvalueornetpresentvaluerelatedtothefutureminimumleasepaymentsasthemeasureisnotbasedontheremainingcontractualpaymentsandthefactormaynotrecognizediscountratesimplicitintheactualleasesorcurrentratesforsimilarobligationswithsimilartermsandrisks.

TheCorporationalsomonitorsitsadjustednetdebtandfinancialleverageratio.AdjustednetdebtiscalculatedasthesumofLong-termdebtandfinanceleaseobligationsandcapitalizedoperatingleaseslessCashandcashequivalentsandShort-terminvestments.Financialleverageiscalculatedasadjustednetdebtover12monthstrailingearningsbeforeinterest,taxes,depreciation,amortizationandaircraftrent.

TheCorporation’smainobjectiveswhenmanagingcapitalare:

> Tomaintainfinancialleverageatorbelowtargetedleverageratiosdeterminedbymanagementtobeprudent;

> ToensurecapitalallocationdecisionsgeneratesufficientreturnsandtoassesstheefficiencywithwhichtheCorporationallocatesitscapitaltogeneratereturns.

> TostructurerepaymentobligationsinlinewiththeexpectedlifeoftheCorporation’sprincipalrevenuegeneratingassets;

> ToensuretheCorporationhasaccesstocapitaltofundcontractualobligationsastheybecomedueandtoensureadequatecashlevelstowithstanddeterioratingeconomicconditions;

> Tomaintainanappropriatebalancebetweendebtsuppliedcapitalversusinvestorsuppliedcapital;and

> TomonitortheCorporation’screditratingstofacilitateaccesstocapitalmarketsatcompetitiveinterestrates.

Inordertomaintainoradjustthecapitalstructure,theCorporationmayadjustthetypeoramountofcapitalutilized,includingpurchaseversusdebtfinancingversusleasedecisions,deferorcancelaircraftexpendituresbynotexercisingavailableoptionsorsellingaircraftoptions,redeemingorissuingdebtsecurities,issuingequitysecurities,andrepurchasingoutstandingshares,allsubjecttomarketconditionsandthetermsoftheunderlyingagreements(oranyconsentsrequired)orotherlegalrestrictions.

ThetotalcapitalandadjustednetdebtasatDecember31iscalculatedasfollows:

2018 2017

Long-termdebtandfinanceleases $ 6,197 $ 5,448Currentportionoflong-termdebtandfinanceleases 455 671

6,652 6,119Capitalizedoperatingleases 3,913 3,801Adjusteddebt 10,565 9,920Shareholders’equity,netofexcesscash 2,043 2,087Total Capital $ 12,608 $ 12,007Adjusteddebt $ 10,565 $ 9,920LessCashandcashequivalentsandShort-terminvestments (4,707) (3,804)Adjusted net debt $ 5,858 $ 6,116

2018 ANNUAL REPORT


18. REVENUE

Disaggregation of revenueTheCorporationdisaggregatesrevenuefromcontractswithcustomersaccordingtothenatureoftheairtrans-portationservices.Thenatureofservicesispresentedaspassenger,cargoandotherrevenueonitsconsolidatedstatementofoperations.TheCorporationfurtherdisaggregatesairtransportationservicerevenueaccordingtogeographicmarketsegments.

AreconciliationofthetotalamountsreportedbygeographicregionforPassengerrevenuesandCargorevenuesontheconsolidatedstatementofoperationsisasfollows:

Passenger Revenues2018 2017

Restated-Note2

Canada $ 4,894 $ 4,637U.S.Transborder 3,504 3,195Atlantic 4,237 3,539Pacific 2,430 2,195Other 1,158 1,027 $ 16,223 $ 14,593

Cargo Revenues2018 2017

Restated-Note2

Canada $ 95 $ 84U.S.Transborder 43 39Atlantic 278 245Pacific 325 280Other 62 60 $ 803 $ 708

Passengerandcargorevenuesarebasedontheactualflownrevenueforflightswithanoriginanddestinationinaspecificcountryorregion.AtlanticreferstoflightsthatcrosstheAtlanticOceanwithoriginsanddestinationsprincipallyinEurope,India,theMiddleEastandNorthAfrica.PacificreferstoflightsthatcrossthePacificOceanwithoriginsanddestinationsprincipallyinAsiaandAustralia.OtherpassengerandcargorevenuesrefertoflightswithoriginsanddestinationsprincipallyinCentralandSouthAmericaandtheCaribbeanandMexico.

OtheroperatingrevenuesareprincipallyderivedfromcustomerslocatedinCanadaandconsistprimarilyofrevenuesfromthesaleofthegroundportionofvacationpackages,buyonboardandrelatedpassengerancillaryservicesandcharges,andotherairline-relatedservices.

2018 ANNUAL REPORT


Contract balances

Thefollowingtableprovidesinformationaboutreceivables,contractassets,andcontractliabilitiesfromcontractswithcustomers.

December 31, 2018

December31,2017

Restated-Note2

January1,2017

Restated-Note2

Receivables,whichareincludedinAccountsreceivable $ 575 $ 587 $ 540

ContractcostswhichareincludedinPrepaidexpensesandothercurrentassets

115 100 98

Contractliabilities–Advanceticketsales 2,717 2,469 2,119

Receivablesincludepassenger,cargoandotherreceivablesfromcontractswithcustomers.TheCorporationsellspassengerticketandrelatedancillaryservicesviacash,creditcardorothercard-basedformsofpaymentwithpaymentgenerallycollectedinadvanceoftheperformanceofrelatedtransportationservices.Passengerticketandancillaryreceivablesareamountsduefromotherairlinesforinterlinetravel,travelagencypaymentprocessingintermediariesorcreditcardprocessorsassociatedwithsalesforfuturetravelandareincludedinAccountsreceivableontheconsolidatedstatementoffinancialposition.Cargoandotheraccountsreceivablerelatetoamountsowingfromcustomers,includingfromfreightforwardersandinterlinepartnersforcargoandotherservicesprovided.

Contractcostsincludecreditcardfees,commissionsandglobaldistributionsystemchargesonpassengertickets.Thesecostsarecapitalizedattimeofsaleandexpensedatthetimeofpassengerrevenuerecognition.

AirlinepassengeradvancesalesandthegroundportionofvacationpackagesaredeferredandincludedinCurrentliabilities.AdvancesalesalsoincludetheproceedsfromthesaleofflightticketstoAeroplan.Thedeferredrevenueisrecognizedwhentherelatedflightoccursorovertheperiodofthevacation.TheCorporationperformsregularevaluationsontheadvanceticketsalesliability.TheCorporationrecordsanestimateofbreakagerevenueforticketsthatwillexpireunused.Theseestimatesarebasedonhistoricalexperience.

Dependingonthefareclass,passengersmayexchangetheirticketsuptothetimeoftheflightorobtainarefund,generallyinexchangeforthepaymentofafee.Fornon-refundableticketsthatremainunusedatthetimeofflight,theCorporationrecognizesthefullamountintorevenueattimewhentransportationwastobeprovided.Forrefundableticketsthatremainunusedatthetimeoftheflight,theCorporationrecognizesthenetrevenueastheyexpireafteranyrefundamountisissuedtothepassenger.

ThepracticalexpedientinIFRS15allowsentitiesnottodisclosetheamountoftheremainingtransactionpricesanditsexpectedtimingofrecognitionforperformanceobligationsifthecontracthasanoriginalexpecteddurationofoneyearorless.TheCorporationelectstousethispracticalexpedientforthepassengertravelperformanceobligationaspassengerticketsexpirewithinayearifunused.

2018 ANNUAL REPORT


19. REGIONAL AIRLINES EXPENSE

TheCorporationhascapacitypurchaseagreementswithJazz,SkyRegionalandcertainotherregionalcarriers.Expensesassociatedwiththesearrangementsareclassifiedasregionalairlinesexpenseontheconsolidatedstatementofoperations.Regionalairlinesexpenseconsistsofthefollowing:

2018 2017

Capacitypurchasefees $ 1,333 $ 1,267Aircraftfuel 531 412Airportandnavigationfees 296 293Salesanddistributioncosts 153 146Otheroperatingexpenses 529 499Regional airlines expense $ 2,842 $ 2,617

20. SPECIAL ITEMS In2017,theCorporationrecorded$30relatedtocargoinvestigations,asdescribedinNote16,andpaidthefinetotheEuropeanCommissionasrequired,pendingtheoutcomeofitsappeal.

21. SALE-LEASEBACKIn2018,theCorporationenteredintoasaleandleasebackarrangementfor25Embraer190aircraftfornetproceedsof$293,whichresultedintherecognitionofalossondisposalof$188.Theaircraftwillcontinuetobeoperatedunderleasesenteredintoundersuchsale-leasebackagreementuntiltheyfullyexitthefleetprogressivelythrough2019and2020,inlinewiththeCorporation’scurrentfleetplans.Theleasesareaccountedforasoperatingleases.

During2017,theCorporationtookdeliveryoffour787aircraftthatwerefinancedundersale-leasebacktransactionswithproceedsof$740.Thesaleswereatfairvalueandaccordinglytheresultinggainonsaleof$52wasrecognizedinnon-operatingincome.Theleasesareaccountedforasoperatingleaseswith12yearterms,paidmonthly.

22. RELATED PARTY TRANSACTIONSCompensation of Key Management

KeymanagementincludesAirCanada’sBoardofDirectors,PresidentandChiefExecutiveOfficer,DeputyChiefExecutiveOfficerandChiefFinancialOfficer,andExecutiveVice-PresidentandChiefCommercialOfficer.ThePresident,PassengerAirlinesisalsoincludedinthe2017period.Amountsreportedarebasedupontheexpenseasreportedintheconsolidatedfinancialstatements.Compensationtokeymanagementissummarizedasfollows:

2018 2017

Salariesandotherbenefits $ 8 $ 11Pensionandpost-employmentbenefits 1 5Share-basedcompensation 10 18 $ 19 $ 34

2018 ANNUAL REPORT


23. SUBSEQUENT EVENTS

Acquisition of Aimia’s Aeroplan Loyalty Business

OnJanuary10,2019,AirCanadacompletedtheclosingofitspurchaseofAimiaCanadaInc.,ownerandoperatoroftheAeroplanloyaltybusiness,fromAimiaInc.Theaggregatepurchasepricefortheacquisitionconsistedof$450incashplus$47incashforpre-closingadjustments.Thepurchasepriceissubjecttopost-closingadjustmentsandtheacquisitionalsoincludestheassumptionoftheAeroplanMilesliability.AirCanadareceivedpaymentsfromTheToronto-DominionBank(“TD”)andCanadianImperialBankofCommerce(“CIBC”)intheaggregateamountof$822.VisaCanadaCorporation(“Visa”)alsomadeapaymenttoAirCanadaandassumingcompletionoftheAmexBankofCanada(“AMEX”)agreementreferredtobelow,AMEXwilldolikewise.

ConcurrentlywiththeconclusionoftheAeroplanpurchase,AirCanada,TD,CIBC,andVisafinalizedvariouscommercialagreementsrelatingtoandinsupportoftheacquisition,includingcreditcardloyaltyprogramandnetworkagreementsforfutureparticipationinAirCanada’snewloyaltyprogram.Inaddition,TDandCIBCmadepaymentstoAimiaCanadaInc.,nowAirCanada’ssubsidiary,intheaggregateamountof$400asprepaymentstobeappliedtowardsfuturemonthlypaymentsinrespectofAeroplanMiles.AirCanadaalsohasenteredintoanagreementinprinciplewithAMEX,whichalsoissuesAeroplanco-brandedproducts,tosecureitscontinuedparticipationinAirCanada’sloyaltyprogramafter2020.Followingtheclosingoftheacquisition,AimiaCanadaInc.changeditsnametoAeroplanInc.

AirCanada,astheacquirer,willperformbusinesscombinationaccountingasoftheacquisitiondate,whichgenerallyrequiresthattheacquirermeasuretheidentifiableassetsacquiredandliabilitiesassumedattheirfairvalues,subjecttocertainexceptions.TheCorporationisevaluatingtheimpactofthebusinesscombinationaccountingrequirements,whichresultswillbereportedoninAirCanada’sinterimunauditedcondensedconsolidatedfinancialstatementsandnotesforthefirstquarterof2019.

Capacity Purchase Agreement with Jazz and Equity Investment in Chorus

InFebruary2019,AirCanadaconcludedanagreementtoamendandextenditscapacitypurchaseagreement(“CPA”)withJazz,awholly-ownedsubsidiaryofChorusAviationInc.TheamendmentsprovideanextensionoftheCPAtermbytenyearsfromJanuary1,2026toDecember31,2035.Theamendmentsincludevariousminimumlevelsofcoveredaircraftatdifferentpointsintime,providingAirCanadatheflexibilitytooptimizeitsfleetwithinitsnetworkstrategy.TheamendmentsbecameeffectiveretroactivelyasatJanuary1,2019.

ConcurrentlywiththeCPAamendments,AirCanadasubscribedfor15,561,600classBvotingsharesinthecapitalofChorus,representing,attimeofissuance,approximately9.99%oftheissuedandoutstandingclassAvariablevotingsharesandclassBvotingsharesofChorusonacombinedbasis.Thisrepresentsaninvestmentof$97byAirCanada.TheChorusshareswereissuedtoAirCanadaatapriceof$6.25pershare,representinga5%premiumtothefive-dayvolumeweightedaveragepriceofthesharesasofthecloseoftradingonJanuary10,2019.AirCanadaandChorusenteredintoaninvestorrightsagreementunderwhich,amongotherthings,AirCanadawillholdtheinvestmentsharesforaperiodofatleast60months,subjecttocertainlimitedexceptions.

2018 ANNUAL REPORT

160

DIRECTORS

Christie J.B. Clark CorporateDirector,Toronto,Ontario

Gary A. Doer CorporateDirector,Winnipeg,Manitoba

Rob Fyfe CorporateDirector,Auckland,NewZealand

Michael M. Green ChiefExecutiveOfficerandManagingDirector,

TenexCapitalManagement,NewYork,NewYork

Jean Marc Huot Partner,StikemanElliottLLP,Montreal,Quebec

Madeleine Paquin PresidentandChiefExecutiveOfficer,LogistecCorporation,

Montreal,Quebec

Calin Rovinescu PresidentandChiefExecutiveOfficer,AirCanada,Montreal,Quebec

Vagn Sørensen CorporateDirector,London,UnitedKingdom

Kathleen Taylor CorporateDirector,Toronto,Ontario

Annette Verschuren ChairandChiefExecutiveOfficer,NRStorInc.,Toronto,Ontario

Michael M. Wilson CorporateDirector,BraggCreek,Alberta

2018 ANNUAL REPORT

161

OFFICERS

Vagn Sørensen ChairmanoftheBoard

Calin Rovinescu PresidentandChiefExecutiveOfficer

Michael Rousseau DeputyChiefExecutiveOfficerandChiefFinancialOfficer

Lucie Guillemette ExecutiveVicePresidentandChiefCommercialOfficer

Craig Landry ExecutiveVicePresident,Operations

Catherine Dyer SeniorVicePresidentandChiefInformationOfficer

Amos Kazzaz SeniorVicePresident,Finance

Arielle Meloul-Wechsler SeniorVicePresident,People,CultureandCommunications

Ferio Pugliese SeniorVicePresident,GovernmentRelationsandAirCanadaExpress

David J. Shapiro SeniorVicePresident,InternationalandRegulatoryAffairsand

ChiefLegalOfficer

Richard Steer SeniorVicePresident,Operations

Duncan Bureau President,AirCanadaRouge

Samuel Elfassy VicePresident,Safety

Mark Galardo VicePresident,NetworkPlanning

Carolyn M. Hadrovic VicePresidentandCorporateSecretary

Chris Isford VicePresidentandController

John MacLeod VicePresident,GlobalSalesandAlliances

Mark Nasr VicePresident,LoyaltyandeCommerce

Kevin O’Connor VicePresident,SystemOperationsControl

Al Read VicePresident,Airports–NorthAmerica

Renee Smith-Valade VicePresident,In-FlightService

Tim Strauss VicePresident,Cargo

Murray Strom VicePresident,FlightOperations

Jon Turner VicePresident,Maintenance

Andrew Yiu VicePresident,Product

2018 ANNUAL REPORT

TSX price range and trading volume of Air Canada variable voting shares and voting shares (AC)

2018 High Low Volume traded

1st Quarter $ 29.11 $ 22.05 83,265,443

2nd Quarter $ 26.81 $ 20.33 68,206,296

3rd Quarter $ 28.44 $ 20.63 71,010,035

4th Quarter $ 29.39 $ 22.57 90,088,941

312,570,715

Restrictions on voting securities

In 2018, the Canadian Government passed An Act to amend the Canada Transportation Act and other Acts respecting transportation and to make related and consequential amendments to other Acts (also known as the “Transportation Modernization Act”). This Act, among other things, amended the Canada Transportation Act (“CTA”) by increasing, from 25% to 49%, the permitted level of foreign ownership of Canadian air carriers, while capping the voting rights of any single non-Canadian and of the aggregate of non-Canadian air carriers to 25%. Air Canada will seek shareholder approval at its 2019 annual and special meeting of shareholders to amend its articles of incorporation to increase the limits of foreign ownership and control of its voting shares to those permitted by these CTA amendments. The amendments to its articles is being undertaken by way of a court supervised and shareholder approved statutory plan of arrangement and will be subject to shareholder approval and approval of the Quebec Superior Court.

For further informationSHAREHOLDER RELATIONS Telephone: 514-422-6644 Facsimile: 514-422-0296 [email protected]

INVESTOR RELATIONS Telephone: 514-422-7849 Facsimile: 514-422-7877 [email protected]

HEAD OFFICE Air Canada Centre 7373 Côte-Vertu Boulevard West Saint-Laurent, Quebec H4S 1Z3

Internet: aircanada.com

Air Canada complies with the rules adopted by the Toronto Stock Exchange.

TRANSFER AGENT AND REGISTRAR AST Trust Company (Canada) 2001 Robert-Bourassa Boulevard, Suite 1600 Montreal, Quebec H3A 2A6

Telephone: 1-800-387-0825 (Canada and United States) 416-682-3860 (other countries)

Inquiries may also be submitted by email to: [email protected]

Ce rapport annuel est publié dans les deux langues officielles du Canada. Pour en recevoir un exemplaire en français, veuillez communiquer avec les Relations avec les actionnaires.

English or French, it’s the client’s choice

Official Languages at Air Canada

For Air Canada, offering service in the language chosen by its customers is essential. Verbal exchanges with clients, public-address announcements at the airport and on board as well as briefing of passengers with special needs all constitute the very heart of customer service and call upon our employees’ linguistic skills at all times. Our consideration to bilingualism not only makes good sense customerwise but also supports our legal obligations to serve the public in the two official languages of Canada.

Air Canada puts great efforts to better serve clients in the language of their choice. It is through reach-out activities with the minority language communities as well as ongoing employee awareness and training that we can face the daily challenges, whether it is the growing difficulty to recruit bilingual candidates outside the province of Quebec and the national capital region, or for our employees to maintain their language skills with very little opportunities to practice the acquired language in some regions of the country.

INVESTOR AND SHAREHOLDER INFORMATION

IN-HOUSE PRODUCTION BY: AIR CANADA MULTIMEDIA COMMUNICATIONS CENTRE

Air Canada is Canada’s largest domestic and international airline, serving more than 220 airports on six continents. Canada’s flag carrier is among the 20 largest airlines in the world and in 2018 served nearly 51 million customers. In 2018, Air Canada, together with Jazz, Sky Regional and other regional airlines operating flights on behalf of Air Canada under capacity purchase agreements, operated, on average, 1,613 daily scheduled flights, comprised of 64 Canadian cities, 60 destinations in the United States and a total of 98 cities in Europe, Africa, the Middle East, Asia, Australia, the Caribbean, Mexico, and South America.

Air Canada is a founding member of the Star Alliance® network. Through the 28-member airline network, Air Canada offers its customers access to 1,317 destinations in 193 countries, as well as reciprocal participation in frequent flyer programs and the use of airport lounges and other common airport facilities.

Air Canada is the only international network carrier in North America to receive a Four-Star ranking according to independent U.K. research firm Skytrax, which also named Air Canada the Best Airline in North America for 2018.

Corporate profile

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2018 annual report...air canada’s unit costs, or cost per available seat mile (casm), increased...

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