Air Canada Q3 2026 Call: Record Revenue, but Fuel Recovery Lags and Guidance Is Cut

Air Canada reported record third-quarter revenue of CAD 7 billion, but a 68% jump in fuel prices cut the EBITDA margin to 13.4% and full-year EBITDA and free cash flow guidance were lowered. Management called the gap a question of timing, not demand.

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Air Canada is in the news because Nasdaq's earnings coverage on 31 October 2026 featured highlights of its third-quarter call, held on 29 October 2026. The call centred on record revenue colliding with a sharp rise in jet fuel costs that the airline said it has not yet recovered through fares.

Key takeaways

  • Operating revenue rose 21% to a record CAD 7 billion on about 6% more capacity, an 89% load factor (up almost 3 points) and yields up 11%, per CFO John Di Bert.
  • Adjusted EBITDA of CAD 936 million was roughly flat on last year, but the margin fell to 13.4% from 16.6% as fuel expense rose CAD 906 million (fuel price per litre up 68%).
  • Air Canada recovered 46% of the incremental fuel cost in the quarter against an original expectation of 60%; management expects 70% in the fourth quarter.
  • Full-year adjusted EBITDA guidance is now CAD 2.4-2.7 billion, about CAD 500 million below the prior midpoint, and free cash flow is guided to breakeven plus or minus CAD 150 million.
  • Management removed more than 2 points of planned first-quarter 2027 capacity and said it is reviewing the pace of capacity growth to protect margins.

Bull case

  • Demand and revenue quality. Chief Commercial Officer Mark Galardo said premium cabin revenue grew 19%, corporate revenue 22% and cargo revenue 33%, and that corporate demand remains up double digits in the fourth quarter. Sixth Freedom revenue (connecting traffic between third countries) was up 16%, and Galardo expects about 20% growth in the fourth quarter.
  • Fuel gap framed as timing. Di Bert and Galardo argued the shortfall reflects the booking curve rather than weak demand: about half of fourth-quarter bookings had been sold when fuel spiked in September. Galardo said North American fares can be repriced faster, and that cargo, with a very short booking window, recaptures almost 100% of incremental fuel.
  • Balance sheet. Di Bert reported net leverage of 1.3x against a target of 2x or less, liquidity of CAD 8 billion, no material corporate debt maturities until April 2028, and 252.7 million shares outstanding after an CAD 800 million substantial issuer bid, ahead of the 2028 target of under 300 million.
  • Fleet. Management said the A321XLR burns roughly 15-20% less fuel per seat-kilometre than comparable wide-bodies on a transatlantic route, an advantage in the current fuel environment. Six XLRs, the first two 787-10s and seven A220s are scheduled for delivery in the fourth quarter.
  • Costs. Adjusted CASM rose 3.3%, in line with expectations; Di Bert said the labour agreement reset cycle is now largely in the cost base and expects year-over-year CASM growth to decelerate in 2027.

Bear case

  • Fuel recovery below plan. Fuel averaged CAD 1.48 per litre versus the CAD 1.38 assumed on the second-quarter call, an intra-quarter headwind of CAD 140 million that includes CAD 22 million of hedging gains. Analyst Jamie Baker (JPMorgan) noted the 70% fourth-quarter recapture estimate is lighter than what peers have indicated; Galardo attributed this to a roughly 60-40 long-haul to short-haul network, where long-haul bookings are made further in advance.
  • Cash and returns. Third-quarter free cash flow was a usage of CAD 440 million. Year-to-date free cash flow of CAD 1.3 billion includes about CAD 500 million from sale-leaseback transactions, and the guidance assumes about CAD 1 billion of such transactions in 2026.
  • Leverage. Di Bert said earnings pressure from fuel will weigh on the leverage ratio over the next couple of quarters if fuel stays elevated.
  • Softer market growth and competition. In response to Fadi Chamoun (BMO), Galardo said market demand growth is decelerating to 2-3% from 4-5% in prior quarters, with flat first-quarter load factors on the books so far. He also cited pressure in the Sun destination market and on the Pacific, and a recent slowdown on the transatlantic over two to three weeks that he expects to be transitory.
  • Disagreement on revenue and the transborder market. An analyst's model implied high-single-digit fourth-quarter RASM; Galardo said that is not what the company sees and that passenger unit revenue should be in double digits but slightly lower than in the third quarter, against a record fourth quarter last year. An analyst described the transborder market as being in structural decline; Galardo said third-quarter transborder results were excellent and he has no reason for concern.

What management said

  • "Fuel recovery remains a question of timing, not demand." — John Di Bert, CFO
  • "Our objective remains to achieve full fuel recapture over time." — John Di Bert, CFO
  • "we do not expect to fully recover the incremental costs in the fourth quarter." — Mark Galardo, Chief Commercial Officer
  • "the cargo business is doing extremely well." — Mark Galardo, Chief Commercial Officer

Risks

  • Fuel price. Fuel is the largest variable in the outlook; about half of fourth-quarter fuel needs are exposed to price changes, and management plans for CAD 1.72 per litre in the fourth quarter (CAD 1.29 in the August outlook).
  • Fare pass-through. Galardo said the market has not yet fully priced in current fuel levels and that carriers are testing demand elasticity; long-haul bookings made well in advance are hard to reprice.
  • Capacity and competition. Aggressive competitor capacity in Sun markets and growth in Chinese capacity on the Pacific were cited by Galardo; ultra-long-haul flying is being re-evaluated, and the Singapore route has been suspended.
  • Investment cycle. Fleet capital expenditure steps up through the end of 2026 and into 2027 as deliveries ramp up.
  • Investment-grade ambition. Di Bert said the aspiration remains intact but the path depends on cash generation through the next 12-18 months.

Outlook

  • 2026 guidance. Capacity (ASM) growth of about 2.75%; adjusted CASM up 5.5-6%; adjusted EBITDA of CAD 2.4-2.7 billion; free cash flow of breakeven plus or minus CAD 150 million (previously CAD 200-500 million). The change is driven mainly by the higher fourth-quarter fuel assumption.
  • Fourth quarter. Sustained yield strength, load factors broadly flat year over year, fuel recovery of about 70%, and costs shifted from the third quarter into the fourth.
  • 2027. No formal guidance. Management is planning for fuel to stay elevated, has removed more than 2 points of first-quarter capacity, and expects to reach pre-pandemic capacity levels while carefully reviewing the pace of growth. It plans to renew its normal course issuer bid in November but will remain opportunistic.
  • Not committed to. A 2027 capacity or CASM figure, when full fuel recapture will be reached (Galardo said he cannot say), how fuel is recovered beyond the fourth quarter, a split of the capacity plan for 2028, and Aeroplan proceeds run-rate (Di Bert offered to discuss that offline). Di Bert said it is too early to tell the pricing environment into 2028.

Sources