Air Canada Releases Second Quarter Results, Reports $62 Million Operating Income and $30 Million Net

For the quarter ended June 30, 2002, Air
Canada reported operating income of $62 million, a $134 million improvement
from the second quarter of 2001. Income before foreign exchange on long-term
monetary items and before income taxes was $16 million, an increase of
$159 million from the prior year.

“In an industry in turmoil, Air Canada was the only international carrier
based in North America that produced a net profit in the second quarter,” said
Robert Milton, President and Chief Executive Officer. “This is a clear
indication that the changes we started implementing over a year ago to
transform the airline - well before most of our North American peers began
adjusting to new market realities - are beginning to show results.
“Air Canada`s unit cost reduction and unit revenues have outperformed all
major international North American airlines, relative to last year. Unit costs
have been reduced in most categories through significant productivity gains in
the workforce, improved aircraft utilization and significant process changes.
Despite a weak revenue environment and continued downward pressure on yields,
we generated positive cash flow from operations and ended the quarter with
encouraging results. We have achieved the first steps towards a new business
model through segmentation of the market, implementation of information
technology solutions, streamlining of distribution channels and initiatives to
illuminate the value of our ancillary businesses. While the industry outlook
is still bleak, and we have more work to do to transform the airline, I am
proud of these achievements and the efforts of our employees towards returning
Air Canada to profitability.

“Due to on-going weakness in business travel demand, we continued to
shift excess capacity, primarily from under-performing transborder business
routes, to growing sun and leisure markets. The on-going renewal of the Air
Canada fleet and timely reconfiguration of aircraft are key elements that
offset downward pressure on revenues. This, in addition to our disciplined
participation in the growing discount market, contributed to Air Canada
posting a 2 per cent improvement in RASM in Mainline domestic markets.

“Tango, our low fare, no-frills service, has been particularly effective
in allowing us to compete in the current low fare environment. In the quarter,
Tango service expanded 70 per cent from the first quarter, representing 12 per
cent of our domestic capacity coast to coast. With this expansion, average
load factors remained high at 78 per cent, over 4 percentage points above
domestic Mainline operations, and Mainline domestic yield, including Tango,
was up 4 per cent. With Tango, we have the flexibility to adjust our product
offering to best respond to shifts in seasonal and consumer demand - resulting
in a significant cost advantage. Our plans are on track to launch our Calgary-
based low fare carrier, ZIP, in response to demand in the short haul low fare
market in Western Canada.

“In tandem with our cost reduction and productivity enhancement
initiatives, we continue to focus on providing our customers with safe,
reliable air service as well as introducing further improvements to service in
the air and on the ground. In May, Air Canada was ranked in the Official
Airline Guide (OAG) international survey of frequent flyers as the Best
Airline in North America, and our frequent flyer program, Aeroplan, as the
Best in the World. These honours serve to remind us that with every flight we
have the opportunity to earn our customers` repeat business.

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“A weak revenue environment in certain markets, particularly regional and
U.S. transborder, remains an ongoing challenge. However, I am pleased at Air
Canada`s relatively strong performance in the overall North American industry
and expect we will post a profit in the third quarter.”

The Corporation reported operating income of $62 million, a $134 million
improvement from the second quarter of 2001. Income before foreign exchange on
long-term monetary items and before income taxes was $16 million, an increase
of $159 million from the prior year. Net income was $30 million or $0.23 per
share, diluted, for the quarter ended June 30, 2002, as compared to a net
income of $44 million or $0.32 per share, diluted, in the 2001 quarter. In
January 2002, Air Canada adopted a new CICA policy for foreign exchange and
accordingly restated 2001 results which increased the 2001 second quarter
earnings by $165 million before tax ($152 million after tax) from the
originally published results. In addition, beginning in July 2001, Air Canada
ceased to record income tax recoveries on unconsolidated results of
operations.

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