Air Canada ($AC)

Thank you for standing by. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Air Canada's First Quarter Earnings Call. [Operator Instructions]. It is now my pleasure to turn the call over to Amanda Murray, Head of Investor Relations. You may go ahead.

Thank you, Tina. [Foreign Language] Welcome to Air Canada's First Quarter 2026 Earnings Call. Thank you for joining us today. On the call with me are Michael Rousseau, our President and Chief Executive Officer; Mark Galardo, our Chief Commercial Officer and President of Cargo; and John Di Bert, our Chief Financial Officer. Other members of our executive team are also with us and available for the Q&A portion of the call. Before we begin, I remind everyone that today's discussion may contain forward-looking information regarding Air Canada's outlook, objectives and strategies. Actual results could differ materially due to various assumptions, risks and uncertainties. Please refer to our Q1 2026 earnings release, our 2025 full year and 2026 first quarter MD&A and filings available on aircanada.com and on SEDAR+. With that, I will turn the call over to Mike.

Thank you, Amanda. [Foreign Language] everyone. Thank you for joining us today. Before I begin, I'd like to acknowledge the recent incident at LaGuardia Airport. On behalf of everyone at Air Canada, I want to express my sincere condolences and sympathy to those affected. Our thoughts are with the passengers, crews, firefighters and families impacted. Safety remains the foundation of our industry and our first priority, which is why we remain engaged with the U.S. and Canadian authorities as they continue their investigation of this incident. I also want to thank the employees who helped in our emergency response by supporting the families of affected passengers and crew, taking care of our customers and keeping the operations running. Turning to our results. In the first quarter, we delivered a year-over-year growth of 61% in adjusted EBITDA, reflecting disciplined execution in a volatile operating environment. I truly believe the last 2 consecutive quarters of record results reflects the underlying strength of our plan and business model, and all stakeholders should be extremely excited as we move into the growth phase of our long-term strategy. We continue to make progress on our New Frontiers objectives, supported by the strength of our diversified network, premium positioning and loyal customer base. This gives us the flexibility to align capacity with demand across the year and deploy it where returns are the most attractive, a capability that was evident in the first quarter, reflected in strong passenger revenues, solid premium and corporate performances and healthy results at Air Canada Vacations. Since late February, the situation in the Middle East and the sharp increase in global jet fuel prices have created a significant external shock for our industry. The pace of that increase is testing demand resilience across commercial aviation and reinforcing the need for discipline. This is not unique to Air Canada. It is an industry-wide challenge that affects how airlines think about capacity, pricing and risk. In this environment, our focus is on staying flexible, making deliberate decisions and managing the business to prioritize returns and protect cash flow and balance sheet strength. With this backdrop, we suspended our full year guidance and provided Q2 guidance. The Q2 guidance reflects our expectation to offset about 50% to 60% of the incremental fuel expense through disciplined commercial and cost actions. Despite fuel-driven fare increases, we continue to see strong demand across the network and throughout the booking curve. History shows that in periods like this, airlines with scale, diversified networks, premium demand exposure, a strong brand and resilient balance sheets are better positioned to navigate turbulence and emerge stronger. Air Canada has these attributes, and we are laser-focused on disciplined execution, prioritizing returns and cash generation and continuing to strengthen the business for the long term. Importantly, strengthening our business means taking care of our people. I'm pleased to say we successfully negotiated 2 new labor contracts agreements with Unifor for our pilot and flight attendant crew scheduling teams during the first quarter. This reflects our continued commitment to constructive direct union management relations and to fostering a workplace where collaboration drives long-term success. In the operations, this quarter was another reminder of how much progress the team has made. Q1 brought several challenges, unusually cold winter, various ice storms, disruption in certain sun destinations and as I noted, the evolving conditions in the Middle East. In each case, our operations teams responded with focus and compassion, keeping the airline moving and taking care of our customers. I want to thank our employees. Their dedication and professionalism are at the core of the Air Canada brand and important contributors to the sequential improvements in customer sentiment. That connection between our people and our customers is fundamental to who we are as an airline. It is what will continue to strengthen Air Canada. As we look ahead, we are entering an important phase of fleet and product advancement. We recently took delivery of our first Airbus 321XLR, which is scheduled to take its inaugural flight on June 15. With additional aircraft deliveries expected this year, along with 2 787-10s, these aircraft will strengthen our premium offering. We have completed 7 Boeing 737 MAX conversions to Air Canada Rouge and are on track for 45 by year-end. Together, our people, investments in fleet, product, digital and customer experience puts us in a solid position to take advantage of as opportunities arise and to execute on our new frontier objectives. Before I wrap up, I announced my upcoming retirement last month after close to 2 decades with Air Canada. I look forward to supporting our company through this important transition period. I firmly believe Air Canada will continue its flight path from a position of strength with a dynamic leadership team, strong balance sheet and a clear strategy. I'm confident the company is well positioned to continue building on the progress we've made. Thank you. Over to you, Mark.

Thank you, Mike, and good morning, everyone. [Foreign Language] I'd like to thank our employees for their dedication and our customers for their continued support and loyalty. Our consecutive quarterly record results are another clear validation point that Air Canada has the strongest commercial foundation in its history. These industry-leading results are the product of 4 key components: one, international revenue growth supported by Canada's underlying demographics; two, structurally higher-yielding and brand loyal customer segments; three, a diversified and growing Sixth Freedom franchise; and lastly, disciplined capacity management that led to a leading load factor performance amongst our peers. Q1 operating revenues and passenger revenues both grew 11% year-over-year to $5.8 billion and $4.8 billion, respectively. These results were largely driven by an 8% increase in PRASM on 2% more capacity. Our international revenues increased 17% year-over-year, reflecting sustained intercontinental demand. Notably, the Atlantic continued to perform strongly with solid mid-teen unit revenue growth in Q1. We continue to grow into higher-yielding segments with premium revenues growing 11% year-over-year. In fact, business class revenues outpaced the economy cabin by 2 percentage points. Corporate revenues increased 14% on strength across all geographies, which in part is supported by tailwinds from Canada's diversifying trade objective. We produced a record Sixth Freedom results on an increasingly varied mix of passenger flows. Our successful expansion into Latin America drove more than half of the 18% year-over-year increase in Sixth Freedom revenues. Lastly, our first -- our record first quarter load factor and unit revenue performance are a testament to the strength of our commercial model and disciplined capacity management. With load factors roughly 5 percentage points above some of our North American peers, we continue to demonstrate our strong ability to execute against our strategic priorities. Building on this momentum, cargo, an important contributor to the profitability of our long-haul franchise with revenues growing 4% year-over-year in Q1. And despite disruptions in Cuba and Mexico, increased sun capacity enabled record first quarter revenues for Air Canada vacations and was the driving force behind a 19% increase in other revenues. Taken together, our first quarter results demonstrate significant progress in reducing Air Canada seasonality and speaks to the differentiated, diversified and resilient commercial strategy that is driving continued top line growth. Looking ahead, we are diligently managing an evolving geopolitical and macroeconomic landscape. Air Canada was one of the first airlines to implement fare increases as the crisis unfolded. Since then, we have implemented multiple rounds of passenger fare and ancillary increases, and we are ticketing forward yields at mid-teens above last year. Cargo has also taken action, including increasing spot rates and introducing a carrier surcharge to the market. We are seeing resilient demand across most geographies and customer types. Our commercial model allows us to be competitive and attract different customer types, enabling a unique ability to tap into more resilient and loyal customer segments. We're also proactively reducing lower margin and hub overflight routes and consolidating frequencies where optimal. As of right now, our capacity outlook for the second quarter calls for a year-over-year ASM growth of between 0.5% to 1%, and we remain agile and disciplined in capacity management in the latter half of the year. In total, we believe that our commercial and cargo actions will contribute to a recovery of the incremental fuel expense of approximately 50% to 60% in the second quarter. We continue to see strong demand across the network and throughout the booking curve into the latter half of the year. Importantly, we recognize that the situation continues to evolve, and we're ready to implement a variety of adjustments as required. Shifting to other topics. Air Canada's network remains one of the most far-reaching in North America, and the majority of our new routes for 2026 are booking in line or above their comparable set. We will be introducing our first A321XLR to customers in a few weeks' time, marking an important milestone in Air Canada's next chapter. As the only Canadian airline to offer lie-flat seats on a narrow-body, this aircraft will be deployed shortly on transatlantic and key North American markets from Toronto and Montreal. To close, Air Canada is using its strong commercial foundation and differentiated position to drive these results. We have proven that our commercial performance is resilient in volatile conditions and that our teams are executing on our long-term strategy. Over to you, John.

Thank you, Mark. [Foreign Language] I thank our employees who kept operations running smoothly and continue supporting our customers with caring class. The first quarter was a continuation of the strong execution we delivered in the fourth quarter of 2025, underscoring the effectiveness of our plan and the progress we're making across the business. Adjusted EBITDA increased 61% year-over-year to $623 million, a first quarter record, representing a margin of 10.8%. We reported adjusted loss per share of $0.05 in the quarter compared to a loss of $0.45 in the first quarter of last year. These results exceeded market expectations and demonstrated strong commercial execution, network optimization, operational resiliency and continued progress on cost management initiatives. As anticipated, adjusted CASM increased 5.5% year-over-year. This increase was primarily driven by the expected impact of higher labor costs related to previously negotiated agreements. It was further strained by operational inefficiencies related to capacity constraints during the quarter, including cancellations to the Middle East, weather disruptions in the Northeast and localized challenges in certain sun markets. Importantly, however, total nonfuel costs in the quarter were broadly in line with our internal expectations. Turning to fuel. Volatility increased meaningfully as the quarter progressed. Prices rose sharply in March and more than offset the benefits we saw earlier in the period. As a result, fuel expense was broadly flat year-over-year in the first quarter. Lower priced inventory and our fuel hedging gains helped moderate the impact in Q1. We do expect elevated fuel prices to be more impactful in our results beginning in the second quarter. Cash flow performance was strong. We generated a record $1.8 billion of cash from operations in the quarter, reflecting a solid operating performance and the momentum of seasonal working capital built ahead of the peak travel season. We note that this was supported by strong advanced ticket sales and the effect of higher fares. Free cash flow delivered a record $1.6 billion, and it included $283 million in proceeds from the first in a series of sale and leaseback transactions that will restore our level of fleet ownership to our historical levels of 65% to 70% over the next 2 years. Our operating cash flow strength, combined with the planned benefits of our sale-leaseback strategy and a sustained level of solid on-hand liquidity allow us to repurchase close to 8 million shares, deploying $142 million under our active NCIB authorization. This brings our total cumulative investment in the share repurchases to $1.5 billion since the inception of our $2 billion target buyback program. We announced at December 2024 Investor Day. We ended Q1 with approximately 287 million shares issued and outstanding, representing a 20% reduction of our share count as at September 30, 2024. We continue to protect the strength of our balance sheet and maintain our focus on financial resilience. We ended the quarter with a net leverage ratio of 1.4x EBITDA. We will now use our financial strength to improve our gross leverage ratio, and we'll be repaying our upcoming August debt maturity using on-balance sheet liquidity while staying comfortably above our stated liquidity target of 15% of revenues. As we complete the debt paydown, we will pause the share repurchases in the near term, but we will revisit this decision in the second half of the year. We are executing our financial strategy with discipline as we optimize capital allocation in line with our priorities, prioritize the balance sheet strength and preserve flexibility, make ROIC accretive investments in the airline and return cash to investors. We are very well positioned to play both offense and defense as we navigate the current environment. Let's now turn to our outlook. Due to continued uncertainty and variability of outcomes for future jet fuel prices, we are suspending our full year 2026 guidance. However, we are introducing Q2 guidance to share what we are expecting in the current quarter. We anticipate Q2 adjusted EBITDA in the range of $575 million to $725 million, and we expect to grow capacity by 0.5% to 1% year-over-year in the quarter. We reflect the forward fuel curve as of April 28 in our Q2 assumptions of USD 4.15 per gallon. Including transportation, taxes and hedging gains, our planning rate is CAD 1.28 per liter. We are ticketing forward yields at mid-teens above last year, reflecting around USD 4 per gallon in equivalents. We expect to offset about 50% to 60% of the incremental fuel expense through disciplined commercial and cost actions, including the benefits of fuel hedging. The actions to mitigate the impact of higher fuel prices will have some adverse effects on unit costs. We have made some adjustments to Q2 and the second half capacity, and we will continue to monitor the need for further reductions. Additionally, we will see some impact from increased absolute sales and distribution costs given higher fares. We remain focused on containing costs and have initiated actions across the organization to generate variable cost savings through improved planning, optimization and operational discipline. We remain focused on execution and agility, and we will continue monitoring conditions closely and be prepared to act, taking deliberate actions to protect our results and preserve financial strength. So to close, in the face of heightened volatility, our priorities are clear: one, stay laser-focused on managing the controllables, including commercial actions, capacity management and cost containment; two, protect cash generation and balance sheet strength; and third, preserve and advance our long-term value creation strategies. Despite the short-term challenges, we are very well positioned. We remain poised to play both offense and defense as the current environment evolves and ultimately find stability and resolution. With that, back to you, Amanda, for questions.

Thank you, John. Tina, please open the line for questions from our analysts.

[Operator Instructions] And our first question comes from the line of Tom Fitzgerald from TD Cowen.

I was just wondering if you could maybe unpack a little bit of your -- what you're seeing in terms of revenue across the geographies and by customer segment in the second quarter?

Sure. So Tom, when you look at it, North America, obviously, is much more resilient. Going into Q2, we had fewer RPMs booked relative to our Atlantic and Pacific, where going into the quarter, we already had the majority of our baseload basically booked. So if you look at Q2, you'll see a much higher yield in North America. You'll see higher yields in the transatlantic. The Pacific is a bit more challenging in that some of the carrier surcharges are regulated by governments in Asia, particularly Korea, Japan, China, et cetera. And if you look at it by cabin, again, there's a clear trend where premium yields and demand continues to be really, really strong. And I think you'll see that carrying all the way through Q3 and the early part of Q4.

Okay, great. And that's very helpful. And then just as a follow-up, just kind of like as it sits right now, just how you're thinking about maybe like thresholds for cutting capacity in the second half of the year. I don't know if we should expect maybe second half of August or post September or beyond, that maybe is the focus, just given how strong 3Q usually is. But just any framework there? And then just in tandem with that, just how you think about managing this CASM ex close?

On the capacity side, we're really going 2, 3 months at a time here. So we've now brought July, August and the early part of September in our window. It's a little bit early to tell for Q4 because the demand signals that we're seeing for Labor Day and beyond suggest that we're really looking at a strong period of demand. And that's consistent with the last 2 Q4s, which were record Q4s for us. But definitely, for July and August, we're going to be reducing capacity trimming lower profitability flights, hub bypasses, kind of marginal frequencies on routes where we have a substantial amount of frequencies. But for Q4, it's still a little bit early to make a definitive statement on how much we're going to cut or keep in place.

Your next question comes from the line of Fadi Chamoun with BMO.

Mark, I just wanted to get your thoughts like what are you seeing in terms of bookings going into the third quarter? How are they holding up? And maybe if you can give us a sense of how much kind of demand degradation if you're seeing, if any, given the higher prices that you have kind of put in place?

So Fadi, the answer for Q3 is we are not seeing any demand degradation right now. All of our services are still above last year in terms of current bookings on hand, but also new bookings to come. We've been in the green for the better part of the last 2 months. So despite multiple increases in fares, we have not seen demand degradation right now. Going into Q3, our load factor or book load factor is about 2 points ahead of where it was last year at this time.

Okay. Just a follow-up then. So in the second quarter, you're saying the hedging and higher fares offset 50% to 60% of the higher fuel cost. I'm guessing the higher fares lag a little bit in the recovery because of the timing. Like how would you think about that coverage going into the third quarter, assuming fuel is at the forward curve basically that we're at now?

Yes. And that changes all the time, right? So if you would have asked me that question a week ago, we actually had a curve on April 22. We've updated that to 28. We would have been well into the 70s. Probably now maybe somewhere in the low 70s still attainable, and we'll watch this thing as it moves around, right? I mean the last couple of days have been very volatile, so hard to tell. But we're having pretty good recapture. And I would say that Q4, obviously, very good.

Okay. And you have no hedging, I'm guessing for like Q3 or after?

Correct. Correct. That's a straight go through on fuel, yes, in the second half.

Your next question comes from the line of Konark Gupta with Scotiabank.

I had a follow-up on the fuel side. John, if you can remind us what would have been the net impact of fuel price in March or Q1?

I missed that question. Can you repeat it to me, please?

Yes. So in Q1, I know you guys were hedged to a degree and you had some lower-priced fuel inventory as well, right? I'm just trying to get a sense of how much fuel price would have impacted the EBITDA in Q1.

Okay. Good. Sure. So we had about a $90 million headwind on fuel at a gross level and about half of that was absorbed by the hedging. So we still were left with probably about $55 million of net-net headwind.

And in terms of demand environment, Mark, it seems like the booking curve is pretty strong even in Q1 or Q2, Q3 now. Like where do you see your network on a relative basis, there's more demand elasticity. I mean, is it by cayman maybe or by region, but where do you see the elasticity starting to show up now?

It's a bit early to comment on elasticity because, again, when we look at it by geography or by point of origin, there's nothing that suggests that things are slowing down. And of course, there is a little bit more pressure in the lower segments of the market. Those might be a bit more price sensitive. But on the premium side, we see good elasticity and good willingness to pay. And obviously, we're more exposed to those segments than others might be.

Our next question comes from the line of Savi Syth with Raymond James.

I was just wondering if you could talk a little bit more about the Sixth Freedom. I know you mentioned seeing a lot of benefit from kind of LatAm as you've seen kind of much of the last year, I think. I was curious if you're seeing any benefit from perhaps the Middle East hub closures or just the fare increases from U.S. airlines, if any of that, you're seeing kind of an acceleration on that side of the business as a result of some of those events?

Yes. So Savi, a couple of ways to answer this question. So firstly, in terms of Middle East exposure, that doesn't really do much for us on the passenger side because we just have a single flight to India, and that's performing very well, obviously, with the situation in the Middle East. The benefit is more on the cargo side where spot rates have gone up and the dislocation is quite significant. On the Sixth Freedom side, when it comes to U.S. to Europe and inbound Europe to U.S., we're looking at low single-digit growth in terms of revenue. Really where we've seen the growth is LatAm to Europe, LatAm to Asia, where we had almost half of our 18% growth in revenue in Q1 was on that sector. We think for us, that's just the beginning. We have a geographic advantage that we need to exploit. So more to come towards the latter half of this year on that.

That's helpful. And if I might just follow up on kind of Tom's first question there. Just curious how much of maybe each quarter was sold prior to the fare increases? And just trying to understand that mid-teen yield when we'll start to kind of really see that come through in the quarters.

Yes. So Savi, going into Q2, we had about 50-odd percent of our bookings already in prior to the -- obviously, the prices. And then going into Q3, it's about a quarter.

Our next question comes from the line of Daryl Young with Stifel.

I just wanted to ask a question around the seasonality comment that you made regarding Q1 and whether you're able to sort of ring-fence how much of that strength was maybe pulled forward of what you would have traditionally expected in Q2, Q3 time frame or any sort of metrics you can put there on how much of a shift in seasonality has happened?

Yes. That shift in seasonality is kind of an intended consequence of what we're trying to do here. Yes, Easter has shifted from April -- late April into the early part of April. It did give some benefit to March. But actually, we had substantial PRASM gains in January and February, led by strength on the transatlantic and strength that we're seeing on our LatAm Sun business. And those are obviously 2 intentional strategies to reduce our seasonality.

Perfect. And then just in terms of fuel management and availability heading into the peak summer season, can you maybe just give us a bit of color around how you're feeling about security of fuel in Europe?

Thanks. I'll start by saying that we're -- we feel very good about our Canadian hubs, and we have significant infrastructure and inventory, and we also have pretty good supply fluidity here. So to your point about Europe, we talk to suppliers every day. And I would say over the next 8 weeks, it looks like that remains solid, and they've done a lot of work on their end in terms of validating their supply chains and capacity to support. Of course, we'll continue to watch this like everybody else as we get deeper into some of the uncertainty here. We're also making some adjustments and able to adjust gauge and do other things to support if there were some form of rationing, we could probably also manage some of the fleet to be able to accommodate that with more fuel-efficient jets into some of the destinations that will be affected.

Your next question comes from the line of Cameron Doerksen with National Bank.

I guess I wanted to ask a bit about what you're seeing from a competitive point of view. I mean, obviously, you've raised your fares quite a bit here to offset fuel. Are you seeing some of the competition, I'm thinking particularly in domestic market doing the same thing? And have you seen, I guess, the proper capacity adjustments from some of your competitors as well as you look ahead to the summer?

Yes. So again, the market is very dynamic. So obviously, what we see today might differ in a couple of weeks' time. But generally speaking, fare increases have been adopted by the market and our competitors almost unanimously across America. And in terms of capacity reductions, I think we all have more or less the same philosophy. We're trying to go at this 2 months at a time because obviously, this could change on them. What we're seeing is competitors are taking capacity out in May and June and left their summer schedules relatively intact.

Okay. And just I guess, maybe philosophically, I mean, you've obviously increased fares as the industry, and we haven't seen a significant degradation in demand. I mean, is this a lesson learned, I guess, for -- in the future when fuel prices go down that you can probably maintain, I guess, some of these fare increases?

This can play out multiple ways, Cameron. Time will tell.

Your next question comes from the line of James McGarragle with RBC Capital.

s Just wanted to ask on the capacity that, that's being trimmed versus your original plan. So how should investors think about the adjusted CASM in Q2 and then during the rest of the year? And is that prior cost reduction program sufficient to kind of hold unit costs in line with the prior framework given the lower-than-planned capacity?

Thanks for the question, James. I'd say that -- and I mentioned this on the last call, but I think that the profile on the front end of the year, the first half is higher, quite a bit higher than the second half. Second half of the year probably feels more like an inflation type of year-over-year growth, first half of the year is higher. There'll be a little bit of pressure here, and it was planned pressure, but there's also some aggravation in Q2. You have things like a higher fare will attract a higher sales commission. And while that's a revenue driver in the sense that it's driving the higher fare, it sits in the CASM unit cost calculation. So we'll have a little bit of both there. The other thing is we are seeing pretty high load factors as we look at the second quarter. And those load factors when they are high, they tend to have an impact on unit cost. So a little bit of capacity, sales and commission and high load factors. The mix of all that in the end does help the revenue side. And so the CASM number will be a little higher. But overall, we think we'll manage it. And the cost reduction initiatives are really to just continue to keep some flexibility here as we look at back end of the year, do we want to adjust capacity further and take off some of the sting of that.

s I appreciate that. And then just on the transborder, I mean as you kind of put through some of these capacity cuts, are you seeing load factors and yields beginning to stabilize? And would you say that right now, you have enough visibility to call it in that entity? Or do the outlook kind of remain a little bit too fluid right now to kind of commit to a recovery time line there? And I'll turn it over after that.

James, we had a really solid Q1, and we're going to have a really solid Q2 on transborder, we're seeing yield, load factor and significant PRASM gains. And part of this, obviously, is because the demand supply balance is a little bit more in our favor. But certainly, there's also been a bit of a soft rebound in the market. But generally speaking, our performance on the U.S. is quite strong.

Your next question comes from the line of Sheila Kahyaoglu with Jefferies.

Maybe if I could just start off with how do you think about your fleet from here if fuel stays at these levels or higher? How are you thinking about how that will impact fleet planning and potential retirements?

I would say that for the time being, we're focused on navigating this. We're coming with a really strong balance sheet. As we kind of work through 2026, we'll have a better view of what the longer-term impacts are. Right now, we're seeing demand being very resilient. And of course, fuel is peaking now, but I would expect that at some point, it would normalize whatever the normalized levels will be. What's important to understand about our growth plan is that it's about structural demand. And we've talked about this before, but it really has a lot to do with restoring some wide-body capacity where we are underserving and continuing to drive Sixth Freedom. So the plan for us to continue to build out that fleet -- we'll modify in the medium term, short term as necessary, but the longer term is to continue to grow. On the retirement side, we do have 319s and some older aircraft, and we've been pretty active even in the current year. I think it's somewhere like 14 or 15 aircraft will be retired. That will continue as planned. And you know that we're also going to standardize our Rouge fleet, and that will bring one of the most fuel-efficient and purpose-built fleets for leisure travel. So we think that our whole fleet plan still works together. And in the short term, if we need to make some tweaks, we'll do that just to navigate this.

And then maybe, I guess, somewhat related to the retirement question, but more market share focused. How do you think about this environment and where you could be potentially more aggressive for market share and where you cut back if you don't see the profit levels?

We're not playing the market share game right now. What we're doing is we're in risk containment mode, especially as we think through summer. Obviously, in this situation, you're always going to have a tranche of flying that once, call it, single-digit margins now becomes unprofitable despite the fare increases. So we're optimizing as required, our network, but we don't see this as an opportunity to subsidize any flying for market share gains.

Your next question comes from the line of Chris Murray with ATB Capital Markets.

So turning back to the guidance for Q2. I mean it's a pretty wide range to start with. It sounds like you've got a lot of the fares already in the bucket or booked. But I'm just wondering, what are the kind of puts and takes kind of to take the bottom end of the range, top end of the range? Is it just fuel or what materializes in fuel? Or are there some other inputs that we can maybe keep an eye on to give us an idea how to gauge this as we go through the quarter?

First thing is I'd look at the middle of the range and start to fill out of that, and that's where we put it. But I think that the biggest variable is fuel. And we do see a lot of volatility. So that can actually turn to the better or it can get a little bit more difficult. I think right now, we feel pretty good about how the quarter has developed. A lot of the inputs, as you said, are in and fuel volatility kind of is the biggest one.

My other question, the federal government put out a couple of items that I think would impact you guys in their spring economic update. One was about the airport ownership rules and how that could evolve. But there was also some interesting commentary about maybe a different way to deal with passenger issues and something I think you guys have talked about maybe replicating a European model. Any comments or thoughts around either of those items? And would you guys be interested in looking at infrastructure down the road? And how do you think that mediation process may work in terms of just managing your costs?

Let me start and Arielle, who heads up TR will fill on the blanks. So the 2 issues that came up, which are not new are the potential airport privatization. That model exists around the world. We're very aware of it. And at this point in time, our focus is on lowering the cost for consumers. So if there is a new model out there, whatever that might look like, if that lowers the cost for consumers, then we'll be supportive. On the APPR, we're actually running a test that was -- we brought the idea to the government to use a European-based ADR type process to speed up the whole process of getting an answer to the customer. And we think that's good from a customer-centric point of view. And so Air Canada is running that test right now. We're in the middle of that test right now with a select number of customers. We're going to see what that test looks -- what the results of that test look like. And then we'll obviously have discussions with the government of Canada about that as well. Arielle, do you want to add anything?

I think that was complete. Thanks, Mike.

Your next question comes from the line of Krista Friesen with CIBC.

Maybe just on the fuel offset. I realize you spoke to expecting to be able to offset about 50% to 60% of the expense in Q2. But if we're in an environment where fuel stays higher for longer, how should we think about what you're targeting for the remainder of the year, say, into Q3 or Q4?

Yes. I guess we did suspend guidance because that's got a lot of variability. If you would have asked me that question, we had an April 22 curve out there. And if you would have asked me that question on that April 22 curve, I would have said somewhere in the mid- to upper 70s for the full year on recovery across the full year. So we'll see how it evolves from here. Right now, I think we're -- we have pretty good line of sight to Q2. Maybe a few puts and takes there. But altogether, I think we have pretty good line of sight. The second half of the year. Just a couple of things to keep in mind. We're pricing at around $4 a gallon equivalent in the fare. And to the extent that fuel does come below $4 a gallon, we'll start to see some recovery as well. So fourth quarter should be obviously a high recovery quarter.

Our final question comes from the line of Andrew Didora with Bank of America.

John, maybe a little bit of a random question here, but I did see in the disclosure in your release, you talked about your Canadian hubs contracting fuel 1 to 2 months ahead of time. This is a little bit different than kind of the way I've thought about it in the past. So does this mean you have decent line of sight into 2Q fuel costs right now? Or maybe to ask it another way, like how much of your 2Q capacity does not have contracted fuel right now?

Sure. Yes. So as I said, the inventory plus the procurement terms that we have for our Canadian hubs in particular, which is not all of our fuel, right? So you have to keep in mind that there's a lot of fuel purchase outside of Canada as well outside of our hubs that does have pricing benefits us because it came in some cases before the pandemic for the first -- sorry, excuse me, before the Middle East crisis for the first quarter and parts of the second quarter are protected as well. As we look into Q2, I'd say that maybe 1/3 about roughly, kind of think about that, 1/3 of our fuel, maybe just a little bit more than that is still not price. So we basically burned, I don't know, 1.5 billion -- 1.4 billion to 1.5 billion liters in Q2 and maybe say $400 million of that still out the price.

And with no further questions in queue, I will now hand the call back over to Amanda Murray for closing remarks.

Thank you very much for joining us this afternoon. Should you have any questions, feel free to contact myself, Amanda Murray or Ivan Zarate at Investor Relations. Thank you, and have a nice day.

Thank you again for joining us today. This does conclude today's conference call. You may now disconnect.