UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

                             ----------------------
                                   FORM 40-F

            (Check One)

            [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                                       or

           [X] ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005     Commission File Number 0-51034

                             ----------------------

                           ACE AVIATION HOLDINGS INC.
             (Exact Name of Registrant as Specified in Its Charter)

                                 Not Applicable
         (Translation of Registrant's Name Into English (if Applicable))

<TABLE>
<CAPTION>

            Canada                                      4512                                    Not Applicable
<S>                                  <C>                                               <C>
(Province or other Jurisdiction             (Primary Standard Industrial               (I.R.S. Employer Identification
of Incorporation or Organization)    Classification Code Number (if Applicable))            Number (if Applicable))

</TABLE>

                       5100 de Maisonneuve Boulevard West
                                Montreal, Quebec,
                                 Canada, H4A 3T2
                                 (514) 422-5000
   (Address and telephone number of Registrant's principal executive offices)

                              CT Corporation System
                                111 Eighth Avenue
                            New York, New York 10011
                                 (212) 894-8940
            (Name, address (including zip code) and telephone number
        (including area code) of agent for service in the United States)


               Securities registered or to be registered pursuant
                          to Section 12(b) of the Act.

                                      None

               Securities registered or to be registered pursuant
                          to Section 12(g) of the Act.

                         Class A Variable Voting Shares
                              Class B Voting Shares

              Securities for which there is a reporting obligation
                     pursuant to Section 15(d) of the Act.

                                      None

                 For annual reports, indicate by check mark the
                       information filed with this Form:

    [X] Annual information form        [X] Audited annualfinancial statements

         Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period covered by the
annual report.

          The Registrant had 76,762,535 Class A Variable Voting Shares,
  25,059,123 Class B Voting Shares and 12,500,000 Preferred Shares outstanding
                            as at December 31, 2005

         Indicate by check mark whether the Registrant by filing the information
contained in this form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
(the "Exchange Act"). If "Yes" is marked, indicate the file number assigned to
the Registrant in connection with such Rule.

          Yes          82-                             No     X
              -------      --------                        ----------

         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.

          Yes    X                                     No
              ----------                                   -----------

<PAGE>



                    DOCUMENTS FILED UNDER COVER OF THIS FORM
                    ----------------------------------------

Document No. 1:        Annual Information Form for the fiscal year ended
                       December 31, 2005.

Document No. 2:        Audited Consolidated Financial Statements for the
                       fiscal year ended December 31, 2005, prepared in
                       accordance with Canadian generally accepted accounting
                       principles and reconciled to U.S. generally accepted
                       accounting principles in accordance with Item 18 of
                       Form 20-F.

Document No. 3:        Management's Discussion and Analysis of Financial
                       Condition and Results of Operations for the fiscal year
                       ended December 31, 2005.

<PAGE>


                                                                 Document No. 1


<PAGE>


                      ACE AVIATION [Logo Graphic Omitted]

                           ACE Aviation Holdings Inc.






                                     ANNUAL


                                   INFORMATION


                                      FORM






                                 March 28, 2006



<PAGE>


                                TABLE OF CONTENTS

                                                                            Page


THE CORPORATION................................................................2

REGULATORY ENVIRONMENT.........................................................6

INDUSTRY OVERVIEW AND COMPETITIVE ENVIRONMENT.................................10

THREE-YEAR SUMMARY: EVOLUTION OF BUSINESS.....................................13

OVERVIEW OF THE BUSINESS......................................................20

BUSINESS OF ACE...............................................................25

TRANSPORTATION SERVICES.......................................................25

AEROPLAN......................................................................31

JAZZ..........................................................................37

ACTS LP.......................................................................40

EMPLOYEES.....................................................................42

RISK FACTORS..................................................................42

MARKET FOR SECURITIES.........................................................43

DIVIDEND RECORD...............................................................44

DESCRIPTION OF CAPITAL STRUCTURE..............................................44

ESCROWED SECURITIES...........................................................49

DIRECTORS AND OFFICERS........................................................50

AUDIT COMMITTEE...............................................................53

INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS....................55

TRANSFER AGENT AND REGISTRAR..................................................55

LEGAL PROCEEDINGS.............................................................56

MATERIAL CONTRACTS............................................................56

EXPERTS.......................................................................56

ADDITIONAL INFORMATION........................................................56

APPENDIX A -  CHARTER AUDIT, FINANCE AND RISK COMMITTEE......................A-1



                                      - i -

<PAGE>



                                    Glossary
                                    --------

Aeroplan -- Means Aeroplan Limited Partnership and its predecessor entities;

Aeroplan Miles -- Means the currency accumulated by Aeroplan members under
the Aeroplan Program;

Aeroplan Program -- Means the loyalty marketing program operated by Aeroplan;

Available Seat Miles or ASMs -- A measure of passenger capacity calculated by
multiplying the total number of seats available for passengers by the miles
flown;

Cargo Services -- Means the business and operations of the Corporation's air
cargo services, including cargo related products, services and ground
operations, carried on, for domestic and transborder cargo services, by AC Cargo
LP and for international cargo services by Air Canada;

Code-share or Code-sharing -- Refers to a commercial agreement between airlines
where an air carrier sells air transportation under its own designator code and
the actual transportation is provided by the other air carrier;

GAAP -- Means generally accepted accounting principles in Canada;

Ground Handling Services -- Means the business and operations of the Corporation
carried on by ACGHS LP (and its United States subsidiary, ACGHS US Inc.) and Air
Canada that provide passenger and aircraft related ground handling services,
including check-in, gate management, baggage and cargo handling and ramp
services;

Passenger Load Factor -- A measure of passenger capacity utilization derived by
expressing Revenue Passenger Miles as a percentage of Available Seat Miles;

Jazz - Means for the period up to September 30, 2004, Jazz Air Inc., for the
period from September 30, 2004 to February 1, 2006, Jazz Air Limited
Partnership, and on or after February 2, 2006, Jazz Air LP;

Passenger Revenue per Available Seat Mile or RASM -- Means the average passenger
revenue per Available Seat Mile;

Revenue Passenger Miles or RPMs -- A measure of passenger traffic calculated by
multiplying the total number of revenue passengers carried by the miles they are
carried;

Technical Services -- Means the heavy maintenance, engine maintenance, component
maintenance, engineering and training business and operations carried on by ACTS
Limited Partnership; and

Yield -- Means average passenger revenue per Revenue Passenger Mile.

                                Explanatory Notes
                                -----------------

The information in this Annual Information Form is stated as at December 31,
2005, unless otherwise indicated.

ACE Aviation Holdings Inc. and the Corporation -- References herein to ACE are
references to ACE Aviation Holdings Inc. itself and references to the
"Corporation" include references, as the context may require, to ACE and its
subsidiaries collectively, ACE and one or more of its subsidiaries, one or more
of ACE's subsidiaries, or ACE itself.

Currency -- All currency amounts used in this document are stated in Canadian
dollars, unless otherwise indicated.

Statistical Information -- Market data and certain industry forecasts used
throughout this Annual Information Form were obtained from internal surveys,
market research, publicly available information and industry publications.
Industry publications generally state that the information contained therein has
been obtained from sources believed to be reliable, but that the accuracy and
completeness of such information is not guaranteed. Similarly, internal

<PAGE>
                                      - 2 -


surveys industry forecasts and market research, while believed to be reliable,
have not been independently verified, and the Corporation does not make any
representation as to the accuracy of such information.

Subsidiaries - References to the term "subsidiary" or "subsidiaries" refers, in
relation to any entity, to any other entity, including a corporation or a
limited partnership, which is controlled, directly or indirectly, by that
entity.

Forward-looking statements -- ACE's communications often contain written or oral
forward-looking statements which are included in this Annual Information Form
and may be included in filings with securities regulators in Canada and the
United States. These forward-looking statements are identified by the use of
terms and phrases such as "anticipate", "believe", "could", "estimate",
"expect", "intend", "may", "plan", "predict", "project", "will", "would", and
similar terms and phrases, including references to assumptions. Such statements
may involve but are not limited to comments with respect to strategies,
expectations, planned operations or future actions. Forward-looking statements,
by their nature, are based on assumptions and are subject to important risks and
uncertainties. Any forecasts or forward-looking predictions or statements cannot
be relied upon due to, among other things, changing external events and general
uncertainties of the business. Results indicated in forward-looking statements
may differ materially from actual results for a number of reasons, including
without limitation, energy prices, general industry, market and economic
conditions, war, terrorist attacks, changes in demand due to the seasonal nature
of the business, the ability to reduce operating costs and employee counts,
employee relations, labour negotiations or disputes, restructuring, pension
issues, currency exchange and interest rates, changes in laws, adverse
regulatory developments or proceedings, pending litigation and actions by third
parties as well as the factors identified throughout this Annual Information
Form and, in particular, those referred to under "Risk Factors". The
forward-looking statements contained in this Annual Information Form represent
ACE's expectations as of the date of this Annual Information Form, and are
subject to change after such date. However, ACE disclaims any intention or
obligation to update or revise any forward-looking statements whether as a
result of new information, future events or otherwise.

                                 THE CORPORATION

Incorporation

         ACE was incorporated on June 29, 2004 under the Canada Business
Corporations Act ("CBCA") and became the parent holding company of the
reorganized Air Canada and its subsidiaries upon the implementation of the
consolidated plan of reorganization, compromise and arrangement of Air Canada
and certain of its subsidiaries under the CBCA, the Companies' Creditors
Arrangement Act ("CCAA") and the Business Corporations Act (Alberta) which was
implemented on September 30, 2004 (referred to herein as the "Plan").

         On September 30, 2004, as part of the implementation of the Plan, Air
Canada reorganized its corporate structure. Pursuant to such corporate
reorganization, APLN Limited Partnership (the predecessor to Aeroplan Limited
Partnership), Jazz Air Inc. (the predecessor to Jazz Air Limited Partnership and
Jazz Air LP), Touram Inc. (the predecessor to Touram Limited Partnership
("Touram LP")) and Destina.ca Inc. (a predecessor to Destina eCommerce Group
LP), which were already established as stand-alone entities under Air Canada,
became stand-alone entities under ACE, while ACTS Limited Partnership ("ACTS
LP"), AC Cargo Limited Partnership ("AC Cargo LP"), AC Online Limited
Partnership (a predecessor to Destina eCommerce Group LP) and ACGHS Limited
Partnership ("ACGHS LP") were established as stand-alone limited partnerships
under ACE. As a result, ACE operates as a parent holding company of Air Canada,
Aeroplan, Jazz, ACTS LP, AC CARGO LP, Destina eCommerce Group LP, ACGHS LP and
Touram LP. Prior to 2002, Aeroplan's operations were integrated with those of
Air Canada. In 2001, management of Air Canada developed a formal plan to create
a separate entity to carry on the operations of the Aeroplan Program. Effective
January 1, 2002, Aeroplan has been operated as a separate entity under Air
Canada. Jazz Air Inc. had been a stand alone entity under Air Canada and on
September 30, 2004 transferred substantially all of its assets and certain of
its liabilities to the newly created Jazz Air Limited Partnership, a stand alone
limited partnership under ACE. Destina.ca Inc. had been a stand alone entity
under Air Canada and on July 31, 2005 transferred substantially all of its
assets and certain of its liabilities to Destina eCommerce Group LP, a stand
alone limited partnership under ACE. ACE's new corporate structure is designed
to facilitate the development of each business unit to its fullest individual
potential including, where appropriate, through the pursuit of third party
sources of business, and to maximize the value of the subsidiaries.


<PAGE>

                                      - 3 -


         On June 29, 2005, Aeroplan Income Fund completed its initial public
offering of 25 million units at a price of $10 per unit. On June 30, 2005,
following the exercise of the over-allotment option by the underwriters,
Aeroplan Income Fund issued an additional 3.75 million units at a price of $10.
On February 16, 2006, ACE announced a special distribution to its shareholders
of units of Aeroplan Income Fund. The distribution of 0.18 units of Aeroplan
Income Fund per Variable Voting Share, Voting Share and Preferred Share (on an
as converted basis) of ACE is being made as a return of capital and represents
in the aggregate approximately 10.1% of the units of Aeroplan Income Fund on a
fully diluted basis. The record date for the purpose of the special distribution
was March 3, 2006 and the payment date is expected to be on or about March 31,
2006. Following the special distribution, ACE holds a 75.5% ownership interest
in Aeroplan Limited Partnership.

         On February 2, 2006, Jazz Air Income Fund completed its initial public
offering of 23.5 million units at a price of $10 per unit. On February 27, 2006,
Jazz Air Income Fund announced that it had issued an additional 1.5 million
units pursuant to the partial exercise of the over-allotment option granted to
the underwriters in conjunction with Jazz Air Income Fund's initial public
offering at a price of $10 per unit. With the partial exercise of the
over-allotment option, ACE currently holds a 79.7% interest in Jazz Air LP.

         The Variable Voting Shares and the Voting Shares of ACE are listed on
the Toronto Stock Exchange ("TSX"), under the symbols "ACE.RV" and "ACE.B",
respectively.

         The head office of ACE is located at 5100 de Maisonneuve Boulevard
West, Montreal, Quebec, H4A 3T2.


<PAGE>
                                      - 4 -


Corporate Structure

         The following table lists the current ACE principal subsidiaries,
including their jurisdictions of constitution and the percentage of equity held
or controlled directly or indirectly by ACE:

<TABLE>
<CAPTION>

<S>       <C>                                      <C>                                         <C>                  <C>

                                                    ---------------------------                100%
                                                  | ACE Aviation Holdings Inc. |_____________________________________
                                                  |          (Canada)          |                                     |
                                                    ---------------------------                                      |
                                                                 |                                      ---------------------
                                                                 |                                     | 1141679 Alberta Ltd.|
                                                                 |                                     |    (Alberta)((9))   |
                                                                 |                                      ---------------------
                ___________________________________________________________________________________________________
               |                         |                           |                      |                      |
         100%  |                75.5%    |                   79.7%   |                100%  |                100%  |
               |                         |                           |                      |                      |
        ----------------        --------------------        ------------------      ---------------       ----------------
       |    Air Canada  |      |  Aeroplan Limited  |      |    Jazz Air LP   |    |    Holdco     |     | Touram Limited |
       |   (Canada)(1)  |      |  Partnership       |      | (Quebec)(8)((11))|    |  Partnerships |     |  Partnership   |
        ----------------       |  (Quebec)(8)((12)) |       ------------------     |  (Quebec)(2)  |     |  (Quebec)(3)   |
            |        |          --------------------                                ---------------       ----------------
            |        |                   |                                                  |
      100%  |        |                   |                                                  |
 -----------------   |                   |                                                  |
| 1209265 Alberta |  |        -----------------------                                       |
|     Ltd.        |  |       |  1209233 Alberta Ltd. |                      ________________________________________
| (Alberta)((10)) |  |       |     (Alberta)((13))   |                     |                  |                    |
 -----------------   |        -----------------------                      |                  |                    |
                     |                                                     |                  |                    |
                     |                                                     |                  |                    |
      --------------------                                          ---------------     ----------------    ----------------
     |  AC Cargo Limited  |                                        | ACTS Limited  |   |  ACGHS Limited |  |    Destina     |
     |  Partnership       |                                        | Partnership   |   |  Partnership   |  |    eCommerce   |
     |  (Quebec)(4)(5)    |                                        | (Quebec)(4)(7)|   |  (Quebec)(4)(6)|  |    Group LP    |
      --------------------                                          ---------------     ----------------   | (Alberta)((4)) |
                                                                                                            ----------------
</TABLE>


____________________

(1)  Air Canada holds all of the issued and outstanding shares of certain
     subsidiaries, including Air Canada Capital Ltd., which is incorporated
     under the laws of the Province of Alberta.
(2)  The Holdco Partnerships, which are limited partnerships governed by the
     laws of the Province of Quebec, are the limited partners of, and hold
     99.99999% of the units in ACGHS LP, ACTS LP and Destina eCommerce Group LP
     (a successor to AC Online LP). ACE is the limited partner of each Holdco
     Partnership and holds 99.9% of the limited partner common units of each
     Holdco Partnership. Wholly-owned subsidiaries of ACE incorporated under the
     laws of Canada, are the general partners of, and hold 0.1% of the units in,
     their respective Holdco Partnership. Air Canada holds all of the limited
     partner preferred units in each Holdco Partnership.
(3)  Touram LP provides tour operator services and leisure vacation packages
     under the trade name Air Canada Vacations and sells surplus seat inventory
     to travel agents under the trade name Netair. On January 31, 2005, Touram
     Inc. transferred all of its assets and certain of its liabilities to Touram
     LP, a limited partnership governed by the laws of the Province of Quebec.
     Prior to its winding-up into ACE on December 29, 2005, Touram Inc., a
     corporation incorporated under the laws of Canada, was the limited partner
     of, and held 99.99999% of the units in, Touram LP. Following the
     winding-up, ACE holds all of the units in Touram LP previously held by
     Touram Inc. Touram General Partner Inc., a wholly-owned subsidiary of ACE
     incorporated under the laws of Canada, is the general partner of, and holds
     0.00001% of the units in, Touram LP.
(4)  The general partners of AC Cargo LP, ACGHS LP, ACTS LP and Destina
     eCommerce Group LP are wholly-owned subsidiaries of ACE incorporated under
     the laws of Canada. Such general partners hold 0.00001% of the units in AC
     Cargo LP, ACGHS LP, ACTS LP and Destina eCommerce Group LP.
(5)  AC Cargo LP, together with Air Canada, provides Cargo Services on domestic,
     transborder and international flights. Air Canada is the limited partner
     of, and holds 99.99999% of the units in, AC Cargo LP.
(6)  ACGHS LP provides passenger and aircraft related ground handling services
     to Air Canada, Jazz and other airlines with a primary focus on Canadian
     stations.
(7)  ACTS LP provides Technical Services and competes on a global basis as an
     aircraft maintenance, repair and overhaul service provider.
(8)  Following the initial public offering of Aeroplan Income Fund and Jazz Air
     Income Fund, ACE holds an interest in the general partners of each of
     Aeroplan and Jazz which is proportional to its interest in their respective
     partnerships.
(9)  1141679 Alberta Ltd. holds and manages excess cash and investments of ACE
     on its behalf. (10) 1209265 Alberta Ltd. holds and manages excess cash and
     investments of Air Canada on its behalf. (11) ACE holds a 79.7% ownership
     interest in Jazz.
(12) ACE holds a 75.5% ownership interest in Aeroplan.
(13) 1209233 Alberta Ltd. holds and manages the investment of a majority of the
     Aeroplan miles redemption reserve on behalf of Aeroplan.
<PAGE>

                                      - 5 -


         Certain subsidiaries, each of which represents not more than 10% of the
consolidated assets and not more than 10% of the consolidated sales and
operating revenues of the Corporation, and all of which, in the aggregate,
represent not more than 20% of the total consolidated assets and the total
consolidated sales and operating revenues of the Corporation at December 31,
2005, have been omitted.



<PAGE>
                                      - 6 -


                             REGULATORY ENVIRONMENT

         In Canada, commercial air transportation, including policy, maintenance
standards, operations standards, safety and ground and navigation facilities,
falls wholly within the jurisdiction of the federal government and is the
responsibility of the Minister of Transport. The Canadian Transportation Agency
is responsible for issuing air carrier licenses for both domestic and
international services and regulates international air fares as well as terms
and conditions of carriage. Since 1996, NAV Canada, a private company, is
responsible for providing air navigation services in Canada. In addition, all
major Canadian airports are operated by local airport authorities that are also
privatized companies.

Domestic Services

         The 1987 deregulation of the domestic airline industry allowed carriers
to establish fares as well as terms and conditions of carriage without
government regulation. The Canada Transportation Act ("CTA") provides for free
market entry to the extent that a carrier can demonstrate that (i) it is
"Canadian", defined in the CTA as being controlled in fact by Canadians and
having at least 75% of its voting interest owned and controlled by Canadians;
(ii) it can operate safely; (iii) it is suitably insured; and (iv) it meets the
minimum financial requirements set out in the Air Transportation Regulations
(Canada) adopted pursuant to the CTA.

         In July 2000, the Government of Canada amended the CTA, the Competition
Act (Canada) and the Air Canada Public Participation Act (Canada) to address the
competitive airline environment in Canada and ensure protection for consumers.
This legislation increased the powers of the Canadian Transportation Agency with
respect to pricing on non-competitive domestic routes, and domestic terms and
conditions of carriage. In addition, this legislation included airline-specific
provisions concerning "abuse of dominance" under the Competition Act (Canada).

         In February 2001, the Competition Bureau released, for consultation,
draft guidelines outlining the approach it proposed to take in enforcing the
airline-specific "abuse of dominance" provisions of the Competition Act (Canada)
including the establishment of administrative monetary penalties for a breach of
the abuse of dominance provisions by a dominant domestic air carrier. The
guidelines describe, among other things, how the Competition Bureau would
calculate whether a carrier is operating or increasing capacity at fares that do
not cover the avoidable costs of providing the services and uses of commissions,
incentives, loyalty programs or corporate discounts that would be regarded as
anti-competitive. The guidelines were never finalized in light of the letter
issued in 2004 by the Commissioner of Competition described below outlining her
approach to enforcement of the airline abuse of dominance provision on a going
forward basis.

         In March 2001, the Commissioner of Competition brought an application
under the "abuse of dominance" provisions of the Competition Act (Canada),
seeking an order prohibiting Air Canada from charging fares on flights on
certain routes in eastern Canada where such fares would not cover the avoidable
costs of such flights. By agreement of Air Canada and the Commissioner of
Competition, the application was divided into two phases. Phase I involved a
review of all of Air Canada's costs from April 2000 to March 2001 and a
determination of which of those cost items would be considered avoidable costs.
The Competition Tribunal released its reasons and findings regarding Phase I on
July 22, 2003, and adopted a broadly crafted avoidable cost test. The decision
of the Competition Tribunal does not constitute a determination that Air Canada
breached the Competition Act (Canada) by abusing its dominant position, which is
an issue that would have been determined in Phase II of the application. As
described below, Phase II of the application will not proceed as the proceeding
was terminated by the Commissioner of Competition with the agreement of Air
Canada, for the reasons described below.

         In September 2004, following extensive discussion with Air Canada, the
Competition Bureau terminated the Competition Tribunal application with the
agreement of Air Canada and published a letter describing the enforcement
approach to be taken by the Competition Bureau to any new complaint made against
a dominant domestic carrier in light of the changes in the airline industry that
have occurred since 2000. In addition, on November 2, 2004, the Minister of
Industry tabled amendments to the Competition Act (Canada) in Bill C-19 which,
if enacted, would have removed the airline-specific "abuse of dominance"
provisions from the Competition Act (Canada). However, on November 29, 2005, the
38th Parliament of Canada was dissolved. As a result, the legislative

<PAGE>
                                      - 7 -


process relating to the adoption of Bill C-19 was terminated. Management cannot
predict if or when such proposed legislation will be re-introduced in the House
of Commons.

         In light of these developments, and as part of the agreement to
terminate the March 2001 application to the Competition Tribunal, Air Canada
determined that it would not appeal the Competition Tribunal's decision in Phase
I of the application. The Competition Bureau has expressed its view that the
principles established by the Competition Tribunal in Phase I of the application
regarding the application of the avoidable cost test would be relevant for any
future cases which may arise in similar circumstances.

         On April 27, 2004, the Government of Canada amended the Canadian
Computer Reservation Systems (CRS) Regulations adopted under the Aeronautics Act
(Canada) to lessen the regulatory requirements and place greater reliance on
market forces in the distribution system that will result in market efficiencies
and reduced costs for airlines. With the amendments, airlines with at least 10%
market share are no longer required to participate in all CRSs operating in
Canada and have the freedom to select the levels of participation that best
serve their operations. Also, all airlines and CRS vendors are now permitted to
freely negotiate fees on strictly commercial terms.

Transborder Services

         In February 1995, a new air services agreement (the "1995 Canada-US Air
Services Agreement") was implemented between Canada and the United States,
replacing the previous bilateral agreement, which had imposed greater
restrictions on market access and fares. This agreement gave Canadian air
carriers unlimited route rights to provide "own aircraft" services between
points in Canada and points in the United States. The carriage of local traffic
between points within one country by carriers of the other country, commonly
known as cabotage, continued to be prohibited.

         Under the 1995 Canada-US Air Services Agreement, rules governing fare
levels and the requirement to file tariffs (excluding rules tariffs) with
government authorities were eliminated. Carriers of both countries are free to
set their own prices for transborder services according to market forces. Prices
may only be disallowed under special circumstances if the authorities of both
countries agree, for example in response to predatory or monopolistic pricing
behaviour on specific routes. In November 1997, Canada and the United States
concluded an agreement that allows Canadian and United States carriers to
Code-share to, from and via each other's territory, with carriers from other
countries provided the other country allows Code-sharing and the carriers hold
the underlying rights to serve that country. As a result, Air Canada increased
its Code-sharing with certain Star Alliance(R) partners via Canada and the
United States and these Star Alliance(R) partners' codes appear on some Jazz
operated transborder flights.

         On November 11, 2005, Transport Canada announced that the governments
of Canada and the United States had negotiated an open skies agreement (the
"Open Skies Agreement") which further liberalized air transportation services
and which is scheduled to come into effect on September 1, 2006. This Open Skies
Agreement will allow air carriers of both countries to (i) pick up passenger
and/or cargo traffic in the other country and carry that traffic to a third
country as part of a service to or from the carrier's home country, (ii) operate
stand-alone all-cargo services between the other country's territory and third
countries, and (iii) offer the lowest prices for services between the other
country and a third country. Cabotage remains prohibited.

International Services

         Scheduled international air services are regulated by the Canadian and
foreign governments involved. The Minister of Transport has the authority to
designate which Canadian air carriers may serve scheduled international routes.
International route rights are obtained through bilateral negotiations between
Canada and foreign countries. Bilateral agreements provide for the rights which
may be exercised over agreed routings and the conditions under which the
carriers may operate, including, among others, the number of carriers which may
operate, the capacity and/or flight frequencies that may be provided and the
controls over tariffs to be charged. Most bilateral agreements to which Canada
is a party provide for the designation of more than one Canadian carrier, while
some provide for the designation of only one Canadian carrier. In general,
bilateral agreements between Canada and European countries are more liberal in
terms of controls on capacity and flight frequencies than those between Canada
and Asian countries.
<PAGE>
                                      - 8 -


         In February 2001, the Minister of Transport launched an international
air services policy review to address competition in the international market
with the objective of liberalizing Canada's policy for scheduled international
air services, including how Canada approaches the negotiation and management of
air traffic rights with other countries.

         In May 2002, the Minister of Transport introduced a liberalized
multiple designation policy applicable to scheduled international air services
by Canadian carriers (excluding services to the United States). Any Canadian
carrier may apply to be designated to serve any foreign country, regardless of
the size of the air travel market. If the number of Canadian carriers permitted
is restricted under existing bilateral agreements, the Canadian government has
indicated that it will pursue negotiations with the appropriate countries to
seek the necessary rights for Canadian carriers. In addition, an incumbent
carrier's designation in a particular market will be subject to reallocation
only in circumstances where the bilateral agreement limits designation and the
carrier is not operating its own aircraft or Code-share services.

Charter Services

         Charter operations are generally not covered by bilateral agreements,
although charter services are covered under the 1995 Canada-US Air Services
Agreement. Canadian government policy permits any Canadian carrier to operate
charter services between Canada and any point in the world subject to prior
approval of the Canadian and other appropriate regulatory authorities. Charter
services are operated by Air Canada to provide service to foreign points where
it is not the designated airline or to generate additional revenues from
aircraft that would otherwise be idle.

         In April 2000, the Minister of Transport announced a new policy
governing international passenger charter air services. This policy removed
restrictions such as advance booking, minimum stay requirements and prohibitions
on one way travel. To preserve a distinction between charter and scheduled
international services, this policy retains the requirements that the entire
seating capacity of an aircraft be chartered and that charter carriers be
prohibited from selling seats directly to the public.

Official Languages Act

         Air Canada is subject to the Official Languages Act (Canada) (the
"OLA"). The OLA compels Air Canada to, among other things, ensure that any
member of the traveling public can communicate with and obtain services in
either official language where there is significant demand for those services
in that language (Part IV of the OLA) and to allow employees to work in either
official language (Part V of the OLA). In 2000, Parliament passed amendments to
the Air Canada Public Participation Act (Canada) (the "ACPP") to impose on Air
Canada the obligation to ensure any of its subsidiaries' customers can
communicate with the subsidiary in respect of air services and incidental
services, and obtain those services, in either official language, where the
number of customers warrants such services.

         In September 2004, as a result of the emergence of Air Canada from
protection under the CCAA, several internal divisions and former subsidiaries of
Air Canada were spun off into limited partnerships under the direct or indirect
control of ACE. While the linguistic obligations stated above continue to apply
to Air Canada itself, ACE and the successor entities it owns are not currently
subject to official language obligations, except that pursuant to the OLA, where
services are performed on behalf of Air Canada by another party, any member of
the public can communicate with and obtain those services in either official
language in any case where those services, if provided by Air Canada, would be
required under the OLA to be provided in either official language.

         On May 2, 2005, Bill C-47, An Act to amend the Air Canada Public
Participation Act (Canada) (the "Bill C-47") was tabled in the House of Commons.
On November 3, 2005, Bill C-47 passed second reading and referred to the
Standing Committee on Transport. Bill C-47 sought to amend existing legislation
to ensure that Air Canada's successor entities are subject to official language
requirements. However, on November 29, 2005, the 38th Parliament of Canada was
dissolved. As a result, the legislative process relating to the adoption of Bill
C-47 was terminated. Although Management cannot predict if or when such proposed
legislation will be re-introduced in the House of Commons, ACE and the relevant
successor entities it owns do comply, or have already taken steps toward
compliance with, Part IV of the OLA.
<PAGE>
                                      - 9 -


Security Initiatives

         Following the September 11, 2001 terrorist attacks, the Minister of
Transport issued new air security measures, including increased passenger and
baggage screening and enhanced security procedures at check-in gates and
on-board the aircraft. Other countries such as the United States and the United
Kingdom have similarly imposed additional security requirements. The
Corporation's priority has been to ensure the safety and security of all
passengers and crew members on all flights. In response to these new measures,
the Corporation has reinforced the cockpit doors on all of its mainline
operating aircraft and has required passengers to produce valid identification
prior to boarding all flights. In December 2001, the Minister of Transport
announced several security initiatives including a new Canadian Air Transport
Security Authority responsible for the provision of key air security services,
an expanded program of armed police on aircraft to cover selected domestic and
international flights, and an air traveler's security charge. The air traveler's
security charge was introduced on April 1, 2002. The charges have been revised
in subsequent federal budgets. Since April 1, 2005, the maximum charge is $10
for domestic travel and $17 for transborder and international travel.

         In October 2002, the Canadian government implemented its Advance
Passenger Information initiative to identify potentially high risk individuals
and address other border security issues. In March 2003, it also established a
Passenger Name Record program. Canadian and foreign carriers are now required by
regulation to provide the Canada Border Services Agency with specific personal
information on all passengers and crew members on board international flights
destined to Canada at the time of departure, as well as to provide access to
passenger name records in the carriers' internal reservation systems. Foreign
countries such as the United States, the United Kingdom, Australia, Mexico and
South Korea have enacted similar information requirements with respect to
flights operating into and/or from their territory.

         On May 6, 2004, Bill C-7, an Act to amend certain Acts of Canada in
order to enhance public safety (known as the Public Safety Act, 2002) received
royal assent. The legislation amends certain provisions of the Aeronautics Act
(Canada) so as to further develop the scope and objectives of the existing
national aviation security regime. The amendments include requirements for
Canadian carriers and foreign carriers operating into Canada to provide, upon
request, information concerning specified flights or persons to the Minister of
Transport, Royal Canadian Mounted Police and Canadian Security Intelligence
Service for transportation security or national security purposes. These
amendments came into force on May 11, 2004.

Safety Initiatives

         On June 15, 2005, the Minister of Transport announced regulatory
amendments to further improve the safety performance of Canadian air operators
and increase accountability in the aviation sector through the implementation of
safety management systems. The goals of safety management systems are to
increase industry accountability, to instill a consistent and positive safety
culture, and to help improve the safety performance of air operators. Amendments
to the Canadian Aviation Regulations require air operators to implement safety
management systems in their organizations and appoint executives who are
accountable for safety. These amendments came into force on May 31, 2005. On May
16, 2005, Bill S-33, An Act to amend the Aeronautics Act and to make
consequential amendments to other acts (Canada) ("Bill S-33") was tabled for
first reading in the Senate. Bill S-33 sought, among other things, to address
integrated management systems and to authorize the establishment of voluntary
reporting programs under which information relating to aviation safety and
security may be reported. On June 14, 2005, Bill S-33 was withdrawn. Management
cannot predict if or when such proposed legislation will be re-introduced.

         Air Canada, Jazz, and ACTS LP are all in the process of implementing
their respective safety management systems in accordance with the recent
amendments to the Canadian Aviation Regulations. The President and Chief
Executive Officer of Air Canada, Montie Brewer has been appointed as the
executive currently accountable for Air Canada's safety management system. The
President and Chief Executive Officer of Jazz, Joseph D. Randell has been
appointed as the executive currently accountable for Jazz's safety management
system. The President and Chief Executive Officer of ACTS LP, Chahram Bolouri
has been appointed as the executive currently accountable for ACTS LP's safety
management system. In addition, the Senior Director Corporate Safety &
Environment, ACE is facilitating the implementation of the Air Canada safety
management system, the Director of Corporate Safety, Jazz

<PAGE>
                                     - 10 -


is facilitating the implementation of the Jazz safety management system, and the
Senior Director, Regulatory Compliance, ACTS is facilitating the implementation
of the ACTS LP safety management system.

Privacy

         The Corporation is subject to Canadian, United States and foreign
privacy laws regarding the collection, use, disclosure and protection of
passenger and employee data. Among other things, Canada's federal private sector
privacy legislation, the Personal Information Protection and Electronic
Documents Act (Canada) (the "PIPEDA"), governs the collection, use and
disclosure of personal information in the course of commercial activities by a
federally regulated business. In addition, the PIPEDA regulates the handling of
employee personal information by federally regulated employers. The PIPEDA also
applies to the collection or disclosure of personal information across
provincial or Canadian international borders and within provinces without
substantially similar private sector privacy legislation. The PIPEDA requires
informed consent by the individuals whose personal information is collected and
used. The personal information may then only be used for the purposes for which
it was originally collected or for other specific purposes specified in the
PIPEDA. The Corporation has a privacy policy which is designed to meet or exceed
the requirements of such privacy legislation. Management believes that its
privacy policy and practices comply with applicable law in Canada and elsewhere.

         In addition to the Corporation's privacy policy, specific privacy
measures and policies to protect the information of customers and employees are
applied by each subsidiary of the Corporation.

                  INDUSTRY OVERVIEW AND COMPETITIVE ENVIRONMENT

Airline Transportation Industry

General

         The airline industry is highly competitive. Over the past two decades,
governments have gradually removed economic regulation of commercial aviation,
resulting in a more open and competitive environment for domestic, transborder
and international airline services, for both scheduled and leisure charter
operations.

         Deregulation has transformed the global airline industry and allowed
the emergence of low-cost carriers. Following in the footsteps of Southwest
Airlines in the United States and easyJet and Ryanair in Europe, the entry in
the Canadian market of low-cost carriers marked the beginning of a rapid shift
in the domestic competitive environment. With their relatively low unit costs,
which result largely from lower labour costs and a simpler product, low-cost
carriers are able to operate profitably while offering substantially lower
fares. By offering such fares to business passengers in particular, these
carriers have succeeded in expanding and taking demand away from the larger,
more established carriers, commonly referred to as "legacy carriers".

         In response to these changes, many legacy carriers have adopted similar
strategies for dealing with competition from low-cost carriers in their
respective domestic markets. A common strategy has been to reduce costs and
capacity by negotiating substantial labour concessions, rationalizing domestic
capacity, and focusing on long-haul premium business routes. These measures
enable the legacy carriers to exploit their competitive advantages in the global
marketplace while also drawing on a much larger customer base.

         The terrorist attacks of September 11, 2001 materially affected the
airline industry, and the airport security procedures that were subsequently
introduced caused air travel to become comparatively more time consuming and
less convenient for passengers. In 2003, the war in Iraq and the outbreak of
SARS (which most dramatically affected Asia and Canada), also adversely impacted
the airline industry.

         In order to realign their business models, many legacy carriers have
restructured or are currently restructuring either through court-supervised or
consensual processes. The degree of restructuring and the changes being
implemented vary from carrier to carrier. The U.S. industry comprises several
legacy carriers in a highly fragmented market, characterized by significant
overcapacity, deep price discounting and increasing competition

<PAGE>
                                     - 11 -


from low-cost carriers (such as Southwest Airlines and JetBlue Airways). The
Canadian airline industry is less fragmented than the U.S. airline industry.

Domestic Market

         Air Canada is Canada's largest domestic full service airline. Jazz is
the largest regional airline in Canada and the second largest airline in Canada
after Air Canada based on fleet size and number of routes operated. The Canadian
airline industry is characterized by a limited number of high density markets,
which account for the majority of passenger traffic and revenue. Domestic
low-cost carriers have achieved a material presence in all major domestic
markets and they continue to expand. The Corporation has redefined its business
strategy in order to compete effectively.

         Based on Official Airline Guide ("OAG") data, the Corporation estimates
that in March 2006, it will provide approximately 61% of the Canadian airline
industry's overall domestic scheduled capacity, as measured by ASMs, while
WestJet will provide approximately 29%.

Transborder Market

         With the most non-stop destinations and flights to the United States,
Air Canada and Jazz carry more passengers between Canada and the United States
than any other airline. Competition in the transborder market is primarily from
the U.S. legacy carriers, which tend to operate flights between the United
States and Canada via their hubs for connecting flights. U.S. legacy carriers
with transborder operations include, without limitation, American Airlines,
Delta Airlines, Continental Airlines, United Airlines and Northwest Airlines.

         Canadian low-cost carriers operate transborder services and are
expanding their operations in the transborder market. WestJet currently provides
transborder services to Orlando, Tampa, Fort Myers, Fort Lauderdale, Los
Angeles, Palm Springs, Phoenix, Las Vegas, Honolulu and Maui. CanJet currently
provides transborder services to New York and Orlando, Florida, year-round, and
seasonally to other destinations in Florida including, St Petersburg, West Palm
Beach, Fort Lauderdale and Sarasota. In addition, a United States low cost
carrier, Frontier Airlines, announced that it will begin transborder services
between Calgary and Denver towards the end of May, 2006.

         Based on OAG data, the Corporation estimates that in March 2006, it
will provide approximately 42% of the overall transborder scheduled capacity as
measured by ASMs.

International Market

         Air Canada has a broad portfolio of international route rights and is
Canada's largest scheduled international carrier. In the trans-Atlantic and
trans-Pacific markets, Air Canada primarily competes with foreign legacy
carriers and, to a lesser extent, with charter and low-cost carriers on higher
density routes, primarily during peak travel seasons. U.S. legacy carriers also
provide indirect competition by flying Canadian passengers through their hubs to
international markets. However, management believes that the U.S. government
policy requiring a visa from residents of certain countries for transit through
the United States has provided an advantage to Air Canada since there is
currently no equivalent requirement that applies to transit through Canada.

         The expansion of major airline alliances, such as Star Alliance(R),
oneworld and SkyTeam has consolidated operations in the trans-Atlantic and
trans-Pacific markets. In the trans-Pacific market, the emergence of polar
routes has provided opportunities for new non-stop services from eastern North
American cities to Asia. Air Canada is pursuing these opportunities by
introducing non-stop services from Toronto to Tokyo, Hong Kong, Beijing,
Shanghai and Seoul, and one-stop service from Toronto to Delhi. The South
American market also represents an area of growth for Air Canada, since no South
American carrier currently flies to Canada.

         Based on OAG data, the Corporation estimates that in March 2006, it
will provide approximately 46% of the overall international scheduled capacity
between Canada and Europe and Canada and Asia, as measured by ASMs.

<PAGE>
                                     - 12 -


         Air Canada is currently the only Canadian scheduled carrier on Asian
routes from Canada, although many Asian countries have their own carriers
serving Canada.

Regional Airline Industry

         The Canadian regional airline industry is composed of Jazz, and a
number of other smaller operators of turboprop aircraft, most of which operate
aircraft in the 19 to 50 seats range. Other than Jazz, these carriers are
primarily stand-alone operations, operating in niche markets. Few other regional
airlines in Canada operate under capacity purchase agreements, and those who do
have relationships with Air Canada to operate turboprop aircraft with 19 seats
or less. All of these carriers, excluding Jazz, are privately held or family-run
companies. None of these carriers approach the size and scope of Jazz's
operation as their fleets range from one to 12 aircraft.

         Jazz is the only regional carrier which offers service in more than one
region of the country as well as transborder service. In addition, it is the
only regional carrier in Canada operating regional jets.

         The Canadian domestic market is characterized by a large geographic
territory with a concentration of routes in Western and Eastern Canada around
four major hubs, Toronto, Vancouver, Montreal and Calgary. This market is served
by Jazz, Air Canada, domestic low-cost carriers such as WestJet and Canjet, and
smaller regional airlines.

         In the transborder market, Air Canada and Jazz compete against a
variety of U.S. network airlines and their regional carriers, the majority of
which operate under capacity purchase agreements. These regional carriers
operate under their respective capacity purchase agreement partner brands
including United Express, America West Express, US Airways Express, Continental
Express, Northwest Airlink, Delta Connection, American Eagle and Horizon
Airlines.

The Canadian Loyalty Marketing Industry

         Loyalty marketing encompasses a wide range of tools and practices
designed to give loyal customers collectible incentives which, when converted
into rewards, form part of a compelling value proposition to continue purchasing
a company's products or services. Loyalty marketing has successfully been used
by companies to attract new customers, enable customer retention and increase
the purchase levels of targeted consumers. It has become a key element in many
companies' marketing mix. Several companies have shifted large portions of their
marketing budgets from mass-market advertising to direct marketing generally,
and loyalty marketing programs in particular. Strong loyalty management systems
allow for the identification and segmentation of customers based on purchasing
behaviour. Unlike other traditional marketing practices generally using mass
media, loyalty marketing creates a direct link between individuals, their
specific demographics and transactional data. Combined with the latest database
management tools and technologies, loyalty marketing is one of the most
sophisticated and measurable forms of marketing.

         There are two main forms of loyalty programs in Canada, coalition
programs and proprietary programs. Coalition programs unite many different
participating organizations under the same program and currency structure, such
as the Aeroplan Program and the Air Miles(TM) program. Proprietary programs only
have a single organization/ currency and generally have a narrower scope of
accumulation opportunities, rewards and benefits. Operators of such programs are
required to support the full infrastructure cost. In Canada, the vast majority
of loyalty programs are proprietary.

         According to The Loyalty Guide -- 2004 published by Wise Research
Limited, a research and publishing company based in the United Kingdom, loyalty
marketing provides consumers with a practical reason for being attracted to and
continuing to buy a partner's products and services: the accumulation of points
or miles toward a valued reward or benefit. Loyalty marketing competes with
other forms of marketing, including direct mail, telephone marketing, mass media
advertising, sales promotions and incentives.

         Increasing competitive pressure for the attention and engagement of
consumers combined with the rapid evolution of technology have created an
environment conducive to the growth of the Canadian loyalty marketing

<PAGE>
                                     - 13 -


industry. Loyalty programs have become prevalent in multiple consumer sectors,
including mass merchandise, retail pharmacies, financial services and the
travel services sector.

Maintenance, Repair and Overhaul Industry

         While aircraft maintenance, repair and overhaul ("MRO") services stem
from three primary customer sources (airlines, original equipment manufacturers,
and other MRO providers), the MRO industry's performance is most dependent on
the airline industry's economic performance. Although airline profit margins
have suffered in recent years as a result of rising fuel prices and a very
competitive market, the industry is showing signs of recovery. As airlines add
capacity and increase traffic, the MRO market is expected to grow in parallel.
According to Overhaul & Maintenance, a magazine devoted to the overhaul and
maintenance industry, the world fleet is forecasted to grow from over 15,000
planes in 2005 to over 25,000 planes in 2015, with regional jets showing the
largest percentage increase.

         Similarly, as airline cost pressures continue to mount, global MRO
outsourcing is expected to continue. According to Overhaul & Maintenance, the
global commercial MRO market is expected to grow to approximately US$55 billion
by 2015, a 45% increase from US$38 billion in 2005. Also, according to Mercer
Management Consulting, almost half of United States carriers' maintenance work
is currently outsourced. This growth is expected in all sectors, including
airframe, engine, components and line maintenance.

         Going forward, successful full-service MRO providers will be ones that
can provide `one-stop' solutions for their customers. Increasingly, airlines and
leasing companies already prefer to deal with a single MRO provider that has the
expertise required to manage all of their MRO work, including airframe,
component, and engine repairs as well as specialized services. However, MRO
operators will continue to be under industry pressure to maintain effective cost
controls to bid competitively in a cost-sensitive marketplace.

                    THREE-YEAR SUMMARY: EVOLUTION OF BUSINESS

Economic Environment

         In early 2003, Air Canada's revenues began to be severely impacted by:
(i) the advent of the Iraq war; (ii) the SARS outbreak; and (iii) the rapid
expansion of WestJet and other low-cost carriers. In combination, these factors
caused Air Canada's passenger revenues to decline significantly in 2003 versus
2002. The operating losses of 2001 and 2002 had already significantly diminished
the liquidity of Air Canada and alternative sources of funding were not
available.

         On March 21, 2003, the Office of the Superintendent of Financial
Institutions ("OSFI") issued directions requiring Air Canada to file new
actuarial valuations of its ten registered pension plans and to make retroactive
current service contributions to eight of those plans in respect of 2002. The
impact of these directions would have been to place a great burden on Air
Canada's liquidity over the ensuing five years in order to fund the pension
plans' solvency deficit in the time required by existing regulations.

         Consequently, with the advice of their financial and legal advisors,
the Applicants (as defined below) elected to restructure their operations, debt
and capitalization under the protection of the Companies' Creditors Arrangement
Act ("CCAA").

Air Canada's Consolidated Plan of Reorganization, Compromise and Arrangement

         On April 1, 2003 Air Canada obtained an initial order from the Ontario
Superior Court of Justice (the "Court") providing creditor protection under the
CCAA. The initial order was further amended by the Court throughout the CCAA
proceedings based on motions from Air Canada, its creditors and other interested
parties. On April 1, 2003, Air Canada, through Ernst &Young Inc., its Court-
appointed monitor ("Monitor"), also made a concurrent petition for recognition
and ancillary relief under Section 304 of the U.S. Bankruptcy Code. The CCAA
and U.S. proceedings covered Air Canada and the following of its wholly-owned
subsidiaries: Jazz Air Inc., ZIP Air Inc., 3838722 Canada Inc., Air Canada
Capital Ltd., Manoir International Finance Inc., Simco Leasing Ltd., and


<PAGE>
                                     - 14 -


Wingco Leasing Inc. (collectively, the "Applicants"). Aeroplan, Touram Inc. and
Destina.ca were not included in the CCAA filing. These three subsidiaries
continued to deal with their creditors on a normal basis, unaffected by the
CCAA and U.S. proceedings.

         The initial order and U.S. proceedings contained a general stay of
proceedings against the Applicants. This stay generally precluded parties from
taking any action against the Applicants for breach of contractual or other
obligations. The purpose of the stay period order was to provide the Applicants
with relief designed to stabilize their operations and business relationships
with customers, vendors, employees and creditors and to allow Air Canada to
develop a process for soliciting new equity or other post emergence financing.
During the stay period, Air Canada developed its revised business plan and
concluded new arrangements with creditors (including aircraft lessors) and
labour unions.

         On September 30, 2004, ACE's predecessor corporation and now its
wholly-owned subsidiary, Air Canada, and the other Applicants, emerged from
creditor protection under the CCAA and implemented the Plan. The purpose of the
Plan, together with Air Canada's new business strategy, was to restructure the
capitalization, operations and cost structure of Air Canada. The Plan and the
new business strategy were designed to:

         (i)     reduce Air Canada's operating costs to a competitive level
                 through the renegotiation of collective bargaining agreements,
                 aircraft leases, real property leases and various other
                 commercial agreements;

         (ii)    implement a fleet renewal program to achieve the appropriate
                 number, size and mix of aircraft for Air Canada's route
                 network;

         (iii)   complete a restructuring of Air Canada's debt and lease
                 obligations;

         (iv)    redefine Air Canada's core product offerings to enable it to
                 compete effectively in the current and future airline industry
                 environment; and

         (v)     reorganize Air Canada's corporate structure to enable certain
                 key businesses to better compete for third party business and
                 generate value for their stakeholders.

         The implementation of the Plan reduced Air Canada's debt (net of cash
and cash equivalents) and lease obligations (on a present value basis) to
approximately $4 billion as at December 31, 2004 compared to $12 billion as at
December 31, 2002, prior to Air Canada's filing for protection under the CCAA.
Also, as part of the implementation of the Plan, all the preferred shares of Air
Canada were cancelled and all of the holders of common shares and Class A
non-voting shares of Air Canada exchanged their shares for Voting Shares and
Variable Voting Shares. Pursuant to such exchange, the former holders of common
shares and Class A non-voting shares of Air Canada received 0.01% of the fully
diluted equity of ACE upon emergence from the CCAA proceedings.

         On September 30, 2004, as part of the implementation of the Plan, Air
Canada reorganized its corporate structure. Pursuant to such corporate
reorganization, APLN Limited Partnership (a predecessor to Aeroplan), Jazz Air
Inc. (the predecessor to Jazz Air Limited Partnership and Jazz Air LP), Touram
Inc. (the predecessor to Touram Limited Partnership) and Destina.ca Inc. (a
predecessor to Destina eCommerce Group LP), which were already established as
stand-alone entities under Air Canada, became stand-alone entities under ACE,
while ACTS LP, AC Cargo LP, AC Online Limited Partnership (a predecessor to
Destina eCommerce Group LP) and ACGHS LP were established as stand-alone limited
partnerships under ACE. Jazz Air Inc. had been a stand alone entity under Air
Canada and on September 30, 2004 transferred substantially all of its assets and
certain of its liabilities to the newly created Jazz Air Limited Partnership, a
stand alone limited partnership under ACE. Destina.ca Inc. had been a stand
alone entity under Air Canada and on July 31, 2005 transferred substantially all
of its assets and certain of its liabilities to Destina eCommerce Group LP, a
stand alone limited partnership under ACE.

         As a result, ACE operates as a holding company for Air Canada and ACE's
other subsidiaries. ACE's new corporate structure is designed to facilitate the
development of each business unit to its fullest individual potential including,
where appropriate, through the pursuit of third party sources of business, and
to maximize the value of the subsidiaries.
<PAGE>
                                     - 15 -


Rights Offering

         As part of the Plan, ACE offered rights to Air Canada's creditors with
proven claims to subscribe for up to $850 million of Voting Shares and/or
Variable Voting Shares ("Shares"). Pursuant to its standby purchase agreement
with Air Canada, Deutsche Bank Securities Inc. ("Deutsche Bank") agreed to act
as the exclusive standby purchaser in respect of the rights offering. As standby
purchaser, Deutsche Bank had the right to syndicate out its rights to purchase
Shares. Deutsche Bank and the participants in its syndicate subscribed for all
the Shares not otherwise subscribed for by the creditors at a subscription price
per Share of $21.50, which represented the subscription price of $20.00 paid by
creditors, plus a premium of $1.50. On September 30, 2004, ACE completed the
issuance of Shares under such rights offering for total gross proceeds of $865
million, including the amount of the premium paid by Deutsche Bank and the
participants of its syndicate pursuant to the standby purchase agreement.

         In accordance with the terms of the standby purchase agreement, ACE
entered into a registration rights agreement with Deutsche Bank, dated as of
September 30, 2004 (the "Registration Rights Agreement"). Under the Registration
Rights Agreement, ACE agreed to use its reasonable best efforts to prepare and
file with the United States Securities and Exchange Commission ("SEC") a
registration statement covering the resale, from time to time, of Registrable
Securities (as defined below) by the Selling Shareholders (as defined below),
and to use its reasonable best efforts to maintain the effectiveness of the
registration statement for a period of two years from the date of effectiveness.
"Registrable Securities" means any Shares purchased by Deutsche Bank or the
participants in its syndicate pursuant to the Plan, including Shares purchased
pursuant to the standby purchase agreement, as well as any securities issued
upon conversion of, in exchange for, or in substitution for such securities.
Such Shares will cease to be Registrable Securities if: (i) they are sold
pursuant to the Resale Prospectus (as defined below); (ii) they are sold
pursuant to an exemption from registration under the 1933 Act and, following
such sale, are freely tradable in the United States and Canada; or (iii) such
Shares cease to be outstanding. "Selling Shareholders" means Deutsche Bank and
each participant of its syndicate for so long as such person is the registered
owner of any Registrable Securities, and such person's heirs, successors and
permitted assigns so long as such heir, successor or permitted assign is the
registered owner of Registrable Securities with a fair market value of at least
$100,000 as of the date of the Resale Prospectus.

         On November 30, 2004, a resale registration statement containing a
resale prospectus (the "Resale Prospectus") was filed with the SEC in accordance
with the terms of the Registration Rights Agreement in order to cover resales of
Registrable Securities by the Selling Shareholders. Based upon information
provided to ACE by the Selling Shareholders, the Selling Shareholders held, as
of November 12, 2004, a total of 26,774,011 Variable Voting Shares and 58,805
Voting Shares. ACE cannot estimate the amount of Shares that will be held by the
Selling Shareholders upon the termination of the two-year period during which
the Resale Prospectus remains valid.

Investment Agreement

         On September 30, 2004, Promontoria Holding III B.V. ("Cerberus
Affiliate") invested $250 million in ACE in consideration for the issuance to
it of 12,500,000 Preferred Shares initially convertible into 9.16% of the fully
diluted equity of ACE upon emergence from the CCAA proceedings. The Cerberus
Affiliate holds all of the issued and outstanding Preferred Shares. For a
summary of the terms of the Preferred Shares, see "Description of Capital
Structure -- Preferred Shares".

         Pursuant to the investment agreement with the Cerberus Affiliate
dated June 23, 2004 ("Investment Agreement"), three of the 11 members of the
board of directors of ACE appointed pursuant to the Plan were designated by
the Cerberus Affiliate. The Cerberus Affiliate has the right to designate
three of the 11 members of the board of directors of ACE for a minimum of two
years after September 30, 2004. After September 30, 2006, for as long as the
Cerberus Affiliate and its affiliates hold at least 75% of the Preferred
Shares (or Shares into which they are converted or convertible) originally
purchased under the Investment Agreement, the Cerberus Affiliate will continue
to have the right to designate three individuals to the board of directors of
ACE. After September 30, 2006, for as long as the Cerberus Affiliate and its
affiliates hold at least 50% but less than 75% of the Preferred Shares (or
Shares into which they are converted or convertible) originally purchased
under the Investment Agreement, the Cerberus Affiliate will have the right to
designate two individuals to the board of directors of ACE. For as long as the
Cerberus Affiliate and its affiliates hold at least 25% but less than 50% of
the Preferred Shares (or Shares into

<PAGE>
                                     - 16 -


which they are converted or convertible) originally purchased under
the Investment Agreement, the Cerberus Affiliate will have the right to
designate one member of the board of directors of ACE. For as long as the
Cerberus Affiliate and its affiliates hold at least 2.5% of the economic equity
interests of ACE, the Cerberus Affiliate will have the right, at reasonable
times and upon reasonable notice, to have access to the management of ACE and to
all reasonable financial and operating information of ACE, including business
plans, budgets and quarterly results, in order to consult with management and
express its views on the business and affairs of ACE and its subsidiaries.

         The Preferred Shares (including the Shares into which they are
converted or convertible) may not be sold, assigned or in any way transferred by
the Cerberus Affiliate (other than to its affiliates) including pursuant to
hedging transactions, swaps or other arrangements transferring any of the
economic consequences of the ownership of the Preferred Shares acquired by the
Cerberus Affiliate for a period of 24 months after September 30, 2004; provided
that, if at any time during such 24-month period the Cerberus Affiliate is
required to convert the Preferred Shares, then the restrictions on transfer with
respect to 50% of the Preferred Shares (and any Shares into which they are
converted or convertible) will be of no force and effect and the restrictions on
transfer with respect to the remaining 50% of the Preferred Shares (and any
Shares into which they are converted or convertible) will be limited only to
sales of beneficial ownership of the Preferred Shares (and any Shares into which
they are converted or convertible) to third parties. Notwithstanding the
foregoing, the transfer restrictions will cease to be in effect as to all
Preferred Shares (and any Shares into which they are converted or convertible)
in the event of a tender offer or take-over bid for any of the Shares, any
change in control transaction, any liquidation, dissolution, bankruptcy or other
similar proceedings of ACE.

         The terms attached to the Preferred Shares provide the Cerberus
Affiliate with preemptive rights on any issuance or sale by ACE of Variable
Voting Shares or Voting Shares or other equity securities, rights, options,
warrants or other convertible securities which represent rights to purchase
Variable Voting Shares or Voting Shares. For further details, see "Description
of Capital Structure -- Preferred Shares -- Preemptive Rights".

GECC Lease Restructuring and Financing

         In 2003 and 2004, agreements were signed between General Electric
Capital Corporation ("GECC") and Air Canada (the "GECC Agreements") which
provided for:

         (i)     the restructuring of existing arrangements for 106 aircraft
                 which included lease rate reductions on 47 aircraft,
                 termination of obligations with respect to 20 parked aircraft,
                 the cancellation of four future aircraft lease commitments and
                 the restructuring of the overall obligations of six aircraft;

         (ii)    exit financing totalling approximately US$681 million in three
                 tranches for use upon emergence from the CCAA proceedings. The
                 loan was repaid in full prior to maturity on April 6, 2005;

         (iii)   a financing commitment of up to US$950 million to be used for
                 acquisitions of new regional jet aircraft (the "RJ
                 Financing"). On exit from CCAA the parties agreed to reduce
                 the commitment to US$500 million; and

         (iv)    the purchase from GECC by Air Canada on September 30, 2004 of
                 two Boeing 747-400 Combi aircraft (which Air Canada was
                 leasing at the time) for an aggregate amount of $353 million.
                 The purchase price was paid for with $290 million in cash and
                 the issuance of a limited-recourse loan in the amount of US$50
                 million. The two Boeing 747-400 Combi aircraft were sold in
                 December 2004 and January 2005 and the proceeds from such sale
                 were used to repay the US$50 million loan from GECC.

Pension Plan Arrangements

         Air Canada sponsors 10 defined benefit registered pension plans for its
employees and retirees in Canada. Canadian federal pension legislation requires
that the funded status of registered pension plans be determined periodically on
both a going concern basis (i.e., essentially assuming indefinite plan
continuation) and a solvency basis (i.e., essentially assuming immediate plan
termination). The solvency position of the pension plans deteriorated
significantly in 2002 as a result of various macroeconomic developments,
triggering a series of valuation and funding directions to Air Canada by OSFI,
the federal pension regulator, in March 2003.
<PAGE>
                                    - 17 -


         On September 30, 2004, after negotiations with OSFI and representatives
of the pension plan stakeholders, the Air Canada Pension Plan Solvency
Deficiency Funding Regulations came into effect. The Regulations extended the
usual five-year amortization period for solvency deficits to ten years, and
provided for the making of variable annual amortization payments according to an
agreed schedule rather than the usual equal annual payments. Air Canada also
issued a series of subordinated secured promissory notes in the aggregate amount
of $346.6 million in favour of the pension plan trustees. The promissory notes
are secured by a second priority charge over assets of Air Canada and certain of
its affiliates and will be reduced by the capital portion of the solvency
deficit amortization payments made by Air Canada to the pension plans in
accordance with the agreed schedule.

Arrangements with Unions

         Following its filing for protection under the CCAA, Air Canada
concluded in 2003 and amended in 2004 long-term collective agreements with the
International Association of Machinists and Aerospace Workers (IAMAW), the Air
Canada Pilots Association (ACPA), the Canadian Union of Public Employees (CUPE),
the Canadian Air Line Dispatchers Association (CALDA), the National Automobile,
Aerospace, Transportation and General Workers Union of Canada (CAW) and the
International Brotherhood of Teamsters (IBT), which expire in 2009. Air Canada
also concluded agreements with the Transport and General Workers Union (TGWU)
and Amicus, both in the United Kingdom. All these labour agreements were
ratified by the members of their respective bargaining units. The agreements
provided for a combination of productivity improvements and wage reductions. All
unconditional employment security provisions in the collective agreements were
also eliminated. All scheduled bonus payments and wage increases were cancelled
and all overtime is now paid at one and a half times the applicable pay rate.
Air Canada also entered into "clean slate" agreements with all of its North
American unions where the parties agreed to resolve, waive or compromise
outstanding grievances.

         These collective agreements provide that, in 2006, the parties may
negotiate the wage provisions for the balance of the collective agreement and,
failing agreement of the parties to adjust wages as circumstances may warrant,
the matter shall be resolved by mediation or binding arbitration without resort
to strike or lock-out.

         The Unions in the United Kingdom, TGWU and Amicus, had a wage re-opener
as part of their extended collective agreements which was effective October 1,
2004. Although there was no general increase to the wage rates provided to
either of the groups, targeted adjustments were made as part of a retention
strategy. The agreements concluded in 2004 expire in 2009 and contain a
provision to reopen negotiations for wages, effective April 1, 2006. Another
component of the agreement between Air Canada and Amicus was the introduction of
a defined contribution pension plan for newly hired employees, to be implemented
following the implementation of a defined contribution plan for non-unionized
employees.

         All of Air Canada's North American unions, have agreements entitling
them to participate in a profit-sharing program under which (i) 7.5% of adjusted
pre-tax profits up to 7% of revenues, and (ii) 25% of adjusted pre-tax profits
above 7% of revenues, will be distributed to eligible employees. Payments under
the profit-sharing program were distributed based on the results of the year
2005.

         Jazz also concluded new collective agreements with its unions following
its filing for protection under the CCAA in 2003. All of Jazz's collective
agreements expire on June 30, 2009 and the unions are not allowed to strike
until the end of the term of the collective agreements. These collective
agreements, except for the collective agreement with the pilot union group of
Jazz, provide for a process to revise the wage levels in mid-2006 by negotiation
or, failing negotiation, by mediation or arbitration. Jazz also entered into
"clean state" agreements with its unions where the parties agreed to resolve,
waive or compromise outstanding grievances.

Contract Renegotiation/Repudiation during CCAA

         During the restructuring period, the Corporation reviewed all of its
real estate facilities, resulting in the elimination of unused or under-utilized
facilities and the consolidation of its operations to further reduce operating
costs. In addition, the Corporation evaluated all of its contracts for goods and
services to identify opportunities to consolidate its supply base, to better
leverage its buying power, and to take advantage of the opportunity represented
by the restructuring process to repudiate contracts that were unfavourable.
<PAGE>
                                    - 18 -


         In addition, the Corporation conducted extensive negotiations with its
aircraft lessors and financiers to restructure its aircraft ownership and
leasing costs. Through these efforts, Air Canada and Jazz achieved: (i) reduced
ownership and leasing costs more consistent with then current market conditions,
(ii) modified lease expiry dates based on planned new aircraft acquisitions and
scheduled heavy maintenance requirements, and (iii) satisfactory aircraft return
conditions consistent with modified lease expiry dates.

Public Offering of Voting Shares, Variable Voting Shares and Convertible Senior
Notes due 2035

         On April 6, 2005, ACE completed the public offering of an aggregate of
11,350,000 Voting Shares and Variable Voting Shares at a price of $37.00 per
share for gross proceeds of approximately $420 million, and $300 million of
4.25% convertible senior notes due 2035 (the "Notes"). ACE used approximately
$553 million of the aggregate net cash proceeds of the offerings to repay all of
its outstanding debt under the exit credit facility with GECC. The repayment of
the GE exit facility has reduced net annual interest costs by an estimated $27
million and has provided ACE with greater strategic and financial flexibility.
On April 13, 2005, following the exercise of the over-allotment option by the
underwriters, ACE issued an additional 1,135,000 Variable Voting Shares at a
price of $37.00 per share and $30 million of Notes for additional aggregate
gross proceeds of approximately $72 million. ACE used the additional proceeds
for general corporate purposes.

Initial Public Offering of Aeroplan Income Fund

         On June 29, 2005, Aeroplan Income Fund completed its initial public
offering of 25 million units at a price of $10 per unit for gross proceeds of
$250 million. On June 30, 2005, following the exercise of the over-allotment
option by the underwriters, Aeroplan Income Fund issued an additional 3.75
million units at a price of $10 per unit for additional gross proceeds of $37.5
million, bringing the aggregate gross proceeds of the initial public offering to
$287.5 million. Aeroplan Income Fund's units trade on the Toronto Stock Exchange
under the symbol AER.UN. Aeroplan Income Fund has acquired a 14.4% ownership
interest in Aeroplan. Following the initial public offering and the exercise of
the over-allotment option by the underwriters, ACE held a 85.6% ownership
interest in Aeroplan.

US Airways Group Inc.

         On September 27, 2005, the Corporation invested $87 million (US$75
million) in US Airways Group Inc. (US Airways) in conjunction with the carrier's
exit from US bankruptcy proceedings. The Corporation's investment represented
approximately 6 percent of the equity of US Airways at December 31, 2005. The
equity investment is subject to a six-month holding period from the closing
date. In connection with the equity investment, ACE also received options to
purchase additional common stock in US Airways. On closing of the transaction,
ACE sold these options for proceeds of $1 million.

Aircraft Purchase Agreement between The Boeing Company and Air Canada

         On November 4, 2005, Air Canada concluded agreements with The Boeing
Company ("Boeing") for the acquisition of up to 36 Boeing 777 aircraft and up
to 60 Boeing 787 Dreamliners. The agreements include firm orders for 18
Boeing 777 aircraft, plus purchase rights for an additional 18 aircraft, in a
yet-to-be determined mix of the 777 family's newest models. Deliveries of the
Boeing 777 aircraft are scheduled to commence in March 2007. Seven Boeing 777
aircraft are expected to be delivered in 2007, nine aircraft in 2008, and two
aircraft in 2009. The agreements also include firm orders for 14 Boeing 787
Dreamliners, plus options and purchase rights for an additional 46 aircraft.
Air Canada's first Boeing 787 aircraft is scheduled for delivery in 2010.

Initial Public Offering of Jazz Air Income Fund

         On February 2, 2006, Jazz Air Income Fund completed its initial public
offering of 23.5 million units at a price of $10 per unit for gross proceeds of
$235 million. On February 27, 2006, following the partial exercise of the
over-allotment option by the underwriters, Jazz Air Income Fund issued an
additional 1.5 million units at a price of $10 per unit for additional gross
proceeds of $15 million, bringing the aggregate gross proceeds of the initial
public offering to $250 million. Jazz Air Income Fund's units trade on the
Toronto Stock Exchange under the symbol

<PAGE>
                                    - 19 -


JAZ.UN. Jazz Air Income Fund has acquired a 20.3% ownership interest in Jazz.
Following the initial public offering and the partial exercise of the
over-allotment option by the underwriters, ACE holds a 79.7% ownership interest
in Jazz.


Distribution by ACE of Units of Aeroplan Income Fund

         On February 16, 2006, ACE announced a special distribution to its
shareholders of units of Aeroplan Income Fund. The distribution of 0.18 units of
Aeroplan Income Fund per Variable Voting Share, Voting Share and Preferred Share
(on an as converted basis) of ACE is being made as a return of capital and
represents in the aggregate approximately 10.1% of the units of Aeroplan Income
Fund on a fully diluted basis. The record date for the purpose of the special
distribution was March 3, 2006 and the payment date is expected to be on or
about March 31, 2006. Following this distribution, ACE holds a 75.5% ownership
interest in Aeroplan.

<PAGE>
                                    - 20 -


                            OVERVIEW OF THE BUSINESS

         ACE is the parent holding company of the following subsidiaries:

                                  AIR CANADA
 AIR CANADA Jazz                                                     aeroplan

                               [GRAPHICS OMITTED]
 ACTS
 Air Canada
 Technical Services                                                  AIR CANADA
                                                                       CARGO
                AIR CANADA                 AIR CANADA
                vacations                  Air Canada
                                      Ground Handling
                                             Services

         Air Canada is Canada's largest domestic and international full-service
airline and the largest provider of scheduled passenger services in the domestic
market, the Canada-US transborder market and each of the Canada Europe, Canada
Pacific, Canada Caribbean/Central America and Canada South America markets.
Passenger transportation is the principal business of the Corporation and, in
2005, represented 84 per cent of its total operating revenues.

         Air Canada and Jazz, the Corporation's regional carrier, operate an
extensive domestic, US transborder and international network. During 2005, Air
Canada and Jazz operated, on average, approximately 1,200 scheduled flights each
day and carried over 30 million passengers. In 2005, Air Canada and Jazz
provided direct passenger air transportation to 159 destinations and, through
commercial agreements with other unaffiliated regional airlines referred to as
Tier III carriers, to an additional 11 destinations, for a total of 170 direct
destinations on five continents. Air Canada's primary hub is located in Toronto,
and its other hubs are located in Montreal, Vancouver and Calgary. Toronto's
Pearson International Airport is Canada's largest airport and Air Canada's
largest hub overall. Montreal's Pierre-Elliott Trudeau International Airport is
a hub for domestic, transborder and international (primarily trans-Atlantic)
traffic. Vancouver International Airport and Calgary International Airport are
hubs for domestic, transborder and international (primarily trans-Pacific in the
case of Vancouver) traffic.

         Air Canada also operates an extensive global network in conjunction
with its international partners. Air Canada is a founding member of the Star
Alliance(R) network, the world's largest airline alliance group. The Star
Alliance(R) network has grown, since its inception, to include 16 members and
three regional members. Through its strategic and commercial arrangements with
Star Alliance(R) members and several other airlines, Air Canada offers service
to over 795 destinations in 139 countries, with reciprocal participation in
frequent flyer programs and use of airport lounges.

         In addition to scheduled passenger service, both Air Canada and Jazz
also operate charter services in the domestic, transborder and international
markets. Air Canada has four of its Airbus A320 aircraft configured in all
business class seating and these aircraft are dedicated to executive style
charter services operated through a division

<PAGE>
                                    - 21 -


of Air Canada called Air Canada Jetz. Air Canada Jetz provides these
executive charter services to customers such as professional sports teams,
rock bands and corporations.

         The Corporation has a controlling interest in Aeroplan which operates
Canada's premier loyalty program. Aeroplan provides its commercial partners with
loyalty marketing services designed to attract and retain customers and
stimulate demand for such partners' products and services. Aeroplan's objective
is to offer its commercial partners superior value relative to other marketing
alternatives through access to Aeroplan's base of members and the design and
execution of marketing programs aimed at increasing revenue, market share, and
customer loyalty. The Aeroplan program is one of Canada's longest standing
loyalty programs. It was founded in 1984 by Air Canada to manage the airline's
frequent flyer program. Aeroplan benefits from its unique strategic relationship
with Air Canada in addition to its contractual arrangements with leading
commercial partners including AMEX, Bell Canada, CIBC, Future Shop, Imperial Oil
(Esso), Star Alliance(R) member airlines and numerous hotel chains and car
rental companies.

         Aeroplan offers its approximately five million active members the
ability to accumulate Aeroplan Miles throughout its partner network through
purchases of products and services. Aeroplan sells Aeroplan Miles to its
extensive network of over 60 commercial partners, representing over 100 brands
in the financial services, travel services and consumer products and services
industries. Today, financial services partners generate the majority of
Aeroplan's revenues.

         Jazz and Air Canada entered into a capacity purchase agreement (the
"Initial CPA") effective September 30, 2004, pursuant to which Air Canada
purchased substantially all of Jazz's fleet capacity based on predetermined
rates. The Initial CPA was replaced by an amended and restated capacity
purchase agreement effective January 1, 2006 (the "CPA") pursuant to which Air
Canada continued to purchase substantially all of Jazz's fleet capacity based
on predetermined rates. Under the CPA with Air Canada, Jazz provides service to
and from lower density markets as well as higher density markets at off-peak
times throughout Canada and to and from certain destinations in the United
States. As of March 1, 2006, Jazz operated scheduled passenger service on
behalf of Air Canada with approximately 730 departures per weekday to 55
destinations in Canada and 22 destinations in the United States with a fleet of
131 aircraft made up of 129 operating aircraft and 2 newly delivered aircraft
that were not yet in active service. Jazz and Air Canada have linked their
regional and mainline networks in order to serve connecting passengers more
efficiently and to provide valuable traffic feed to Air Canada's mainline
routes.

         The Corporation also provides Technical Services through ACTS LP. ACTS
LP is a full-service Maintenance, Repair and Overhaul (MRO) organization that
provides airframe, engine and component maintenance and various ancillary
services to a wide range of more than 100 global customers. ACTS LP operates
maintenance centers across Canada, with principal centers located in Montreal,
Toronto, Winnipeg and Vancouver.

         The Corporation also provides cargo services through AC Cargo LP;
ground handling services through ACGHS LP; and tour operator services and
leisure vacation packages through Air Canada Vacations.

New Business Strategy

         In order to respond to a rapidly changing landscape, the Corporation
has fundamentally changed its business strategy and has been redesigning its
business processes since emergence from CCAA. ACE designed and embarked on a new
business plan to: (i) consolidate the domestic market position of Air Canada and
Jazz through a superior product offering at a competitive cost; (ii) provide a
sustainable foundation for Air Canada's growing international markets; and (iii)
highlight the value inherent in ACE's subsidiaries. The Corporation's new
business strategy is based on the following four major components:

         (i)      a competitive cost structure;

         (ii)     a redesigned network to maximize efficiency and leverage
                  international growth opportunities;

         (iii)    a new revenue model for passenger services; and

         (iv)     a new corporate structure to facilitate the implementation of
                  strategic initiatives and to surface the value of its
                  subsidiaries.
<PAGE>

                                    - 22 -


Competitive Cost Structure

         The Corporation's new business strategy is built on a significantly
improved competitive cost structure. During the CCAA restructuring process and
since emerging from the process, the following three main focus areas have
contributed significantly to the Corporation's benefit:

         (i)      Through the CCAA restructuring process, the Corporation
                  dramatically reduced its operating costs;

         (ii)     Following this, the Corporation embarked on a substantial
                  re-engineering process to simplify its internal processes and
                  reduce its costs even further by eliminating non-value adding
                  tasks and procedures. This is an ongoing process of continuous
                  improvement; and

         (iii)    Additionally, the Corporation has created a new business model
                  whereby its customers can be served directly using web-enabled
                  technology which is envisaged to further eliminate substantial
                  external non-value adding processes between the Corporation
                  and its customers. This too is an ongoing process of
                  continuous improvement.

         Stemming from the above focus areas, the Corporation has realized and
envisages continuing to benefit from substantial cost reductions in the
following areas:

         (i)      substantially reduced supplier obligations, including
                  aircraft and real estate;

         (ii)     significantly improved labour productivity due to a
                  rationalized work force and lower average salaries;

         (iii)    lower trip costs due to better matching of capacity with
                  demand;

         (iv)     higher operating efficiencies through its fleet
                  modernization program;

         (v)      lower pilot training, inventory carrying and maintenance
                  costs;

         (vi)     significantly lower sales and distribution costs by
                  improved and easy to use web-enabled technology for its
                  customers; and

         (vii)    dramatically lower internal costs by eliminating business
                  processes which do not fit the new revenue model.

         Unlike its low-cost competitors, the Corporation incurs costs related
to the offer of value-added transportation services, such as Executive Class
services and other non-air services. The Corporation believes that these costs
are offset by a revenue premium, driven primarily by higher Yield and Passenger
Load Factor, increased international connecting traffic and increased Aeroplan
and cargo revenues. The Corporation expects to maintain this revenue premium by
continuing to leverage its key competitive advantages, including:

         (i)      a more extensive route network, greater flight frequency and
                  greater market presence;

         (ii)     value-added services, for which customers are willing to pay a
                  premium, including unlimited schedule changes, same day stand
                  by, advance seat selection, full Aeroplan mileage, concierge
                  service and Executive Class service; and

         (iii)    higher yielding international (including Canada-US
                  transborder) connections.

Redesigned Network to Maximize Efficiency and Leverage International Growth
Opportunities

         The Corporation's objective is to become the customer's clear choice in
all the markets in which it competes by offering a better scheduled product at a
competitive price. To this end, the Corporation's redesigned network focuses on
offering better flight frequencies on key domestic and Canada-US transborder
routes, while maintaining competitive frequency on other domestic and Canada-US
transborder routes, and reducing the average seating capacity per departure.


<PAGE>
                                    - 23 -

         The Corporation expects to achieve its objectives through the
increased use of large regional jet aircraft which have lower trip costs. This
initiative, for which deliveries commenced in October 2004, will see Air Canada
and Jazz add 90 new regional jet aircraft to their fleet by the end of 2007. As
of the date hereof, the Corporation had received fifteen 50-seat Bombardier
CRJ-200 aircraft, fifteen 75-seat Bombardier CRJ-705 aircraft and fifteen
73-seat Embraer ERJ 175 aircraft under firm order as well as six 93-seat ERJ
190 aircraft. Thirty-nine additional Embraer ERJ 190 aircraft under firm order
are scheduled for delivery during the remainder of 2006 and during 2007. In
addition, as a result of agreements reached with Air Canada's and Jazz's unions
during Air Canada's restructuring under the CCAA, all of the Corporation's
Bombardier CRJ aircraft will be operated out of Jazz's regional operations. The
Corporation expects that the lower trip costs of these regional jet aircraft
will enable the Corporation to compete more effectively with low-cost carriers.
This strategy should allow the Corporation to operate its network more
efficiently by better matching capacity with demand and by facilitating
connections in a timely fashion.

         Since international services generally produce higher margins than
domestic and transborder services, the Corporation also intends to expand its
existing services to currently served international destinations as well as
adding new international destinations. The Corporation believes that it is well
positioned to grow its international services and increase its current market
share by leveraging the following competitive advantages:

         (i)      its superior international network;

         (ii)     its widely recognized brand and its strong position in the
                  market for trans-Atlantic and trans-Pacific travel to and from
                  Canada and more recently the Canada-South America market; and

         (iii)    its ability to capitalize on the relative speed and
                  convenience associated with having its hubs located in Canada
                  which, unlike the United States, does not currently require a
                  visa from residents of certain countries transiting through
                  the country.

         For domestic, Canada-US transborder and international services, the
Corporation will continue to leverage the strengths of its Aeroplan program.

Customer Driven Revenue Model for Passenger Services

         The Corporation's new revenue model for passenger services is aimed at
improving customer satisfaction and retention by focusing on simplicity, value,
choice, transparency and flexibility for the customer and is resulting in
greater passenger volume, higher passenger load factors and increased cost
efficiency for Air Canada and Jazz.

         The new revenue model in North America is based on five simple fare
types ranging from low one-way fares, substantially similar to those offered by
low-cost carriers, to Executive Class fares. The new fares are based on a
different combination of product attributes, including the ability to make
changes to reservations, seat selection, meal service and Aeroplan mileage
earning. The new model provides transparency by allowing customers to compare
prices and travel options and select the most suitable fare. The Corporation
believes that this establishes a clear link between price and value and will be
a key driver in achieving customer loyalty.

         The new revenue model was introduced in Air Canada's and Jazz's
domestic markets in May 2003. In February 2004, the new revenue model was
expanded to all destinations in the continental United States served by Air
Canada and Jazz in cooperation with United Airlines, one of Air Canada's Star
Alliance(R) partners.

         For international markets, Air Canada has taken a similar approach to
simplifying its fare offering and associating value-added attributes to each
fare type. On January 4, 2006, Air Canada expanded its low, simplified fare
structure for flights to and from London Heathrow and Manchester. This
simplified fare structure was then expanded to include flights to and from
Italy, Israel and France. Air Canada plans to convert more international
destinations to its simplified fare structure in the near future.

         The Corporation believes that its increasing use of the Internet to
improve its distribution network has facilitated market acceptance of its new
revenue model. Air Canada currently operates or has in development websites to
serve customers and travel agents in Canada, United States, the Caribbean
region, the United Kingdom, France, Germany, Italy, Ireland, Scandinavia, the
Netherlands, Switzerland, Australia and Hong Kong. Air Canada's Internet
strategy will continue to focus on expanding distribution reach, creating
compelling products and content suited to the web, and enabling its websites

<PAGE>

                                     - 24 -

with functionality that will allow customers to service themselves at all
relevant points in their shopping and travel experience.

         Another key step in the implementation of its new revenue model was the
introduction starting in spring 2004 of a range of online pass products that
offer significant savings for frequent travelers who commit to purchasing
multiple flights in advance. This product also provides online convenience that
underlines Air Canada's commitment to lead the way by giving customers the
ability to plan their travel budgets upfront and enjoy price predictability
throughout the life of their pass. Among the products are: the North America
Pass, which allows travel within zones throughout North America, the Sun Pass
for travel between Eastern Canada and Florida, Arizona or Nevada or between
Western Canada and Arizona, Nevada or California; the Hawaii Pass for travel
between Western Canada and the Hawaiian Islands, and the Oil Express Pass for
travel between Ft. McMurray and Atlantic Canada, among others. In addition, in
September of 2005, Air Canada expanded its line of multi-trip pass products to
include the airline industry's first-ever subscription to unlimited flights.
This "North America Unlimited Pass" provided pass holders the freedom to fly as
often as they wished to more than 100 destinations served by Air Canada and Jazz
in North America for a two-month period from October 1 to November 30, 2005.

New Corporate Structure to Maximize the Value of Subsidiaries

         A new corporate structure was established pursuant to which the various
business segments that were formerly within Air Canada became stand-alone
subsidiaries of ACE. The new corporate structure was designed to:

         (i)      put in place separate management and business plans for each
                  subsidiary to better focus their strategic direction and
                  profit making efforts;

         (ii)     align management, capital and human resource needs within each
                  individual business;

         (iii)    facilitate the development of each business segment to its
                  fullest individual potential including, where appropriate,
                  through the pursuit of third party business; and

         (iv)     maximize subsidiaries' value that was not fully recognized.

         ACE's subsidiaries are at varying stages of their corporate
development, and maximizing value at these entities is a priority in the efforts
of senior management. ACE's value enhancement strategy for its stand-alone
subsidiaries includes considering stand-alone financings, sales or distributions
of equity interests and involving outside investors for these and other
purposes.

         From time to time, ACE reviews acquisition opportunities in respect of
businesses or assets that may be complementary to its own. Where appropriate, to
increase shareholder value, ACE may consider entering into other investment
opportunities.

<PAGE>
                                     - 25 -



                                 BUSINESS OF ACE

         ACE's businesses are operated as four reportable segments which
include: (i) transportation services; (ii) Aeroplan; (iii) Jazz; and (iv) ACTS
LP. The table below sets forth the relative financial result of each business
activity for the year ended December 31, 2005:

<TABLE>
<CAPTION>

                                                              ACE SUCCESSOR COMPANY
                                                           YEAR ENDED DECEMBER 31, 2005
                                -----------------------------------------------------------------------------------
                                                                                        Inter-
(in millions)                   Transportation                                         Segment      Consolidated
                                 Services(1)    Aeroplan(2)  Jazz(3)     ACTS LP     Elimination        Total
                               --------------- ----------- ---------- ------------ -------------- ----------------
<S>                               <C>                <C>       <C>           <C>         <C>             <C>
Operating Revenue
 Passenger Revenue...........    $8,269                -          -            -               -        $8,269
 Cargo Revenue...............       620                -          -            -               -           620
 Other Revenue(4)............       117              627          10         187              -            941
 Inter-segment Revenue.......       194               13       1,013         567         (1,787)             -
                                -----------------------------------------------------------------------------------
Total Revenue................     9,200              640       1,023         754         (1,787)         9,830
Operating Expenses...........     9,026              538         894         707         (1,787)         9,378
                                -----------------------------------------------------------------------------------
Operating Income.............    $  174             $102       $ 129        $ 47              -          $ 452
</TABLE>

__________________

(1)  Includes transportation revenues for services provided both on Air Canada
     and Jazz aircraft and costs for Air Canada operations and fees charged by
     Jazz under the capacity purchase agreement with Air Canada, as well as AC
     Cargo LP, ACGHS LP, Touram LP and ACE operations.
(2)  ACE held an 85.6% ownership interest in Aeroplan as at December 31, 2005
     and currently holds a 75.5% ownership interest in Aeroplan.
(3)  Includes Jazz's operations under the capacity purchase agreement with Air
     Canada. ACE held a 100% ownership interest in Jazz as at December 31, 2005
     and currently holds a 79.7% ownership interest in Jazz.
(4)  Includes revenues and costs for Ground Handling Services, Touram LP, and
     Destina eCommerce Group LP.


                             TRANSPORTATION SERVICES

         Air Canada and Jazz are the Corporation's mainline and regional
airline carrier, respectively. Passenger transportation is the principal
business of the Corporation and, for the years ended December 31, 2004 and
2005, its passenger revenues were derived from domestic, transborder and
international services in the proportions shown in the table below:

                                       Passenger Revenues    Passenger Revenues
                                       for the Period ended  for the Year ended
                                       December 31, 2004     December 31, 2005
                                       --------------------  ------------------
Domestic..............................            40%                  42%

Transborder...........................            20%                  19%

International.........................            40%                  39%
                                                -----                -----
Total.................................           100%                 100%
                                                =====                =====

         Air Canada is Canada's largest domestic and international full-service
airline and the largest provider of scheduled passenger services in the domestic
market, the transborder market and each of the Canada-Europe, Canada-Pacific,
Canada-Caribbean/Central America and Canada-South America markets. According to
OAG data in 2005, Air Canada ranked as the 14th largest carrier in the world,
based on ASMs.

         Jazz, the Corporation's regional carrier, provides service to lower
density markets and to higher density markets at off-peak times throughout
Canada and to certain destinations in the United States, and forms an integral
part of Air Canada's domestic and transborder market strategy. Jazz's regional
network connects passengers and provides valuable traffic feed to Air Canada's
mainline routes.
<PAGE>
                                     - 26 -


Domestic Services

         Air Canada and Jazz provide the largest network and most extensive
product offering in Canada, with scheduled direct passenger service to 56
Canadian destinations in the first quarter of 2006. Based on OAG data, the
Corporation estimates that in March 2006, it will provide approximately 61% of
the Canadian airline industry's overall domestic scheduled capacity as measured
by ASMs. The most important Canadian routes, in terms of operating revenues, are
the transcontinental routes linking Toronto, Montreal and Ottawa with major
Western Canadian cities, including Vancouver, Calgary, Edmonton and Winnipeg.
Air Canada and Jazz operate several short-haul commuter routes, including
Rapidair routes, linking Toronto, Montreal and Ottawa. The Corporation also
offers frequent service linking major centres within Western Canada and operates
numerous flights between Calgary and Vancouver and between Calgary and Edmonton.
In addition to transcontinental and commuter routes, Air Canada and Jazz provide
service between and within Central Canada, the Prairies and the Atlantic
Provinces.

         Unaffiliated regional carriers, referred to as tier III carriers,
replace Jazz in markets not sufficiently large to be served directly. In the
first quarter of 2006, these airlines operate flights under Air Canada's
designator code and provide service to an additional 10 domestic destinations
under commercial agreements with the Corporation. The Corporation does not own
equity interests in any of these carriers.

Transborder Services

         With the most non-stop destinations and flights to the United States,
Air Canada and Jazz carry more passengers between Canada and the United States
than any other airline. Based on OAG data, the Corporation estimates that in
March 2006, it will provide approximately 42% of the overall transborder
scheduled capacity as measured by ASMs. Air Canada and Jazz directly serve 42
U.S. destinations with an additional seven destinations served by tier III
carriers, operating a total of approximately 390 daily flights in the first
quarter of 2006. Air Canada's network reach is also increased by its extensive
connections to, and Code-sharing flights with, United Airlines, one of its Star
Alliance(R) partners.

International Services

         Air Canada is uniquely positioned as Canada's largest scheduled
international airline. In the first quarter of 2006, Air Canada provided
scheduled service directly to 51 destinations in Europe, the Middle East, Asia,
Australia, the Caribbean/Central America and South America. Based on OAG data,
the Corporation estimates that in March 2006, it will provide approximately 46%
of the overall scheduled international capacity between Canada and Europe and
Canada and Asia, as measured by ASMs.

         Air Canada has major trans-Atlantic operations to the United Kingdom,
Germany and France. Air Canada currently operates nine daily flights to London
Heathrow, four daily flights to Frankfurt, one daily flight to Munich and two
daily flights to Paris.

         Air Canada also has significant operations to the Asia-Pacific market
via its Vancouver and Toronto hubs. Air Canada operates daily non-stop flights
to Japan (Vancouver and Toronto to Tokyo and Vancouver to Osaka), China
(Vancouver and Toronto to Beijing and Shanghai), Hong Kong (out of Vancouver and
Toronto) and Korea (Vancouver and Toronto to Seoul). The Corporation also
operates daily flights (one-stop) to India (Toronto to Delhi). In addition to
targeting business travelers, these services also capitalize on the high volume
of passengers who visit friends and relatives in Asia and Canada. The
Corporation believes that the Asia-Pacific market currently represents an area
of growth for air travel.

         In addition, Air Canada has expanded its services to South America,
Australia and Central America/Caribbean. Currently, Air Canada provides service
directly to six destinations in South America, one in Australia, six in
Central America/Mexico and 23 in the Caribbean.

Star Alliance(R)

         Air Canada is a founding member of the Star Alliance(R) network, the
world's largest airline alliance group. Air Canada operates an extended global
network in conjunction with its international partners.


<PAGE>
                                     - 27 -



         The Star Alliance(R) network has grown, since its inception in 1997, to
include the following 16 airlines: Air Canada, United Airlines, Lufthansa, SAS,
Thai Airways, VARIG, Air New Zealand, All Nippon Airways, Austrian Airlines,
Singapore Airlines, bmi, Asiana Airlines, Spanair, LOT Polish Airlines, US
Airways and TAP Portugal. Swiss International Airlines is expected to join on
April 1, 2006 and South African Airways on April 10, 2006. The Star Alliance(R)
network also includes three regional members: Blue 1 (Finland), Adria Airways
and Croatia Airlines.

         Through its strategic and commercial arrangements with Star Alliance(R)
members and several other airlines, Air Canada offers service to over 795
destinations in 139 countries, with reciprocal participation in frequent flyer
programs and use of airport lounges. The Star Alliance(R) facilitates
Code-sharing and passenger connections and transfers by providing a higher level
of service between network connection points (which may include one stop
check-in). The airlines have implemented initiatives, such as common utilization
of facilities, and are focusing on capturing potential synergies in various
areas. Air Canada now Code-shares with all Star Alliance(R) members, except US
Airways, TAP Portugal and the three regional members. In August 2005, the Star
Alliance(R) implemented an interline ticketing service which enables customers
to travel across the entire Star Alliance(R) network using a single electronic
ticket.

Fuel

         Aircraft fuel is a major expense to companies operating within the
airline industry. Since fuel costs represent a significant portion of the
Corporation's operating costs, substantial changes in fuel costs would
materially affect operating results. Fuel prices continue to be susceptible to
factors such as political unrest in various parts of the world, Organization of
Petroleum Exporting Countries (OPEC) policy, the level of demand from emerging
economies, such as China, the level of inventory carried by the industry, the
level of fuel reserves maintained by governments, disruptions to production and
refining facilities and the weather. These and other factors will affect the
price of fuel, which in turn affects the Corporation's financial performance.
Based on 2005 volumes, the Corporation estimates that a US$1 per barrel movement
in the price of West Texas Intermediate crude oil would have resulted in an
approximate C$31 million change in 2005 fuel expense for Air Canada (excluding
any impact of fuel surcharges and fuel hedging), assuming flying capacity
remained unchanged and that refining spreads between West Texas Intermediate
crude oil and jet fuel as well as foreign exchange rates remained constant.

         In order to minimize the Corporation's exposure to the volatility of
fuel prices, a systematic fuel risk management strategy was implemented in
September 2005. The strategy involved using financial instruments to build up
the Corporation's hedge position in increments of approximately 4% per month to
a maximum of 50% of its anticipated fuel requirements for a 24-month period. In
February 2006, the hedging strategy was revised to allow greater flexibility in
terms of increasing or decreasing the scale, nature and timing of fuel hedging.
The Corporation is no longer required to hedge a minimum percentage of its
anticipated fuel consumption per month.

Competition

         The Canadian airline industry is characterized by a limited number of
high density markets, which account for the majority of passenger traffic and
revenue. Domestic low-cost carriers have achieved a material presence in all
major domestic markets and they continue to expand. The Corporation has
redefined its business strategy in order to compete effectively.

         Competition in the transborder market is primarily from the U.S.
legacy carriers, which tend to operate flights between the United States and
Canada via their hubs for connecting flights. U.S. legacy carriers with
transborder operations include, without limitation, American Airlines, Delta
Airlines, Continental Airlines, United Airlines and Northwest Airlines.
Canadian low-cost carriers operate transborder services and are expanding their
operations in the transborder market. WestJet currently provides transborder
services to Orlando, Tampa, Fort Myers, Fort Lauderdale, Los Angeles, Palm
Springs, Phoenix, Las Vegas, Honolulu and Maui. CanJet currently provides
transborder services to New York and Orlando, Florida, year-round, and
seasonally to other destinations in Florida including, St Petersburg, West Palm
Beach, Fort Lauderdale and Sarasota.

         In the trans-Atlantic and trans-Pacific markets, Air Canada primarily
competes with foreign legacy carriers and, to a lesser extent, with charter and
low-cost carriers on higher density routes, primarily during peak travel
seasons. U.S. legacy carriers also provide indirect competition by flying
Canadian passengers through their hubs to

<PAGE>
                                     - 28 -


international markets. However, management believes that the U.S.
government policy requiring a visa from residents of certain countries for
transit through the United States has provided an advantage to Air Canada since
there is currently no equivalent requirement that applies to transit through
Canada.

Air Canada Fleet

         The Corporation has simplified its fleet structure to support its new
business strategy. This fleet simplification includes the elimination of older,
less efficient aircraft which are not economically viable in the new market
environment and the increased utilization of new large regional jet aircraft
which have lower trip costs. The new regional jet aircraft are key to the
Corporation's strategy, which involves offering high flight frequency on key
domestic and transborder routes, while maintaining competitive frequency on
other domestic and transborder routes. The use of regional jet aircraft also
allows the Corporation to better match capacity with demand, by reducing the
average seating capacity per departure, and supports the more efficient use of
the Corporation's network and hubs.

         In addition, a cornerstone of the Corporation's strategy going forward
will be the growth of its international operations. In order to support the
expansion of these operations, Air Canada concluded agreements with Boeing for
the acquisition of new widebody aircraft. The Corporation is scheduled to take
delivery of these Boeing widebody aircraft starting in 2007. The Boeing order
consists of 18 firm Boeing 777 aircraft and 14 firm Boeing 787 aircraft.

         The Air Canada operating fleet at December 31, 2005 and the planned
operating fleets for 2006 to 2008 are shown below:

<TABLE>
<CAPTION>
                                                                                                Planned Operating
                              Number of         Planned          Planned          Planned       Aircraft based on
                              Operating        Operating        Operating        Operating      Future Committed
                           Aircraft as at   Aircraft as at    Aircraft as at    Aircraft as      Aircraft net of
                            December 31,     December 31,      December 31,     at December    Projected Aircraft
                                2005             2006              2007           31, 2008         Removals(5)
                           ---------------- ---------------- ----------------- --------------- -------------------
<S>                             <C>              <C>               <C>              <C>
WIDEBODY AIRCRAFT
Airbus A340-300                 10               10                9                6                --
Airbus A340-500                  2                2                0                0                --
Airbus A330-300                  8                8                8                8                --
Boeing 767-300 ER               33               32                32               32               33
Boeing 767-200/200ER            12               11                9                9                --
Boeing 777/ 200LR                0                0                3                12               12
Boeing 777-200F(3)               0                0                0                0                 2
Boeing 777- 300ER(4)             0                0                5                5                 5
Boeing 787(3)                    0                0                0                0                14
                           ---------------- ---------------- ----------------- --------------- -------------------
TOTAL WIDEBODY AIRCRAFT         65               63                66               72               66

NARROWBODY AIRCRAFT
Airbus A321                     10               10                10               8                 7
Airbus A320                     51               48                42               42               41
Airbus A319                     48               45                43               43               45
CRJ-100 (1)                     10                0                0                0                --
ERJ-190                          3               20                44               45               45
ERJ-175                         14               15                15               15               15
                           ---------------- ---------------- ----------------- --------------- -------------------
TOTAL NARROWBODY AIRCRAFT      136              138               154              153              153
                           ---------------- ---------------- ----------------- --------------- -------------------
TOTAL (AIR CANADA)(2)          201              201               220              225              219
</TABLE>

____________________

(1)  15 Bombardier CRJ-100 were transferred from Air Canada's fleet to Jazz's
     fleet in 2005 and the remaining Bombardier 10 CRJ-100 are expected to be
     transferred by July 2006.
(2)  In addition to operating aircraft, as at December 31, 2005, Air Canada had
     10 widebody aircraft and 18 narrowbody aircraft that were parked.
(3)  The following aircraft are scheduled to be delivered after 2008: two Boeing
     B777-200F (2009) and 14 Boeing 787 (2010/2011).
(4)  Air Canada has entered into a letter of intent with an aircraft lessor
     for one Boeing 777-300ER which is due to be delivered in 2007.
(5)  These aircraft changes are expected to be completed by 2011.


Boeing

         In November 2005, Air Canada concluded agreements with The Boeing
Company ("Boeing") for the acquisition of up to 36 Boeing 777 aircraft and up to
60 Boeing 787 Dreamliners. The agreements include firm orders for 18 Boeing 777
aircraft, plus purchase rights for an additional 18 aircraft, in a yet-to-be
determined mix of the 777 family's newest models. Deliveries of the Boeing 777
aircraft are scheduled to commence in March 2007. Seven Boeing 777 aircraft are
expected to be delivered in 2007, nine aircraft in 2008, and two aircraft in
2009. The agreements also include firm orders for 14 Boeing 787 Dreamliners,
plus options and purchase rights for an additional 46 aircraft. Air Canada's
first Boeing 787 aircraft is scheduled for delivery in 2010. As a result of the
new committed Boeing 777 and 787 aircraft, the Corporation expects to
eventually remove from operations all 20 Airbus A330 and A340 aircraft as well
as all 12 Boeing 767-200 aircraft.

<PAGE>
                                     - 29 -


Embraer

         In 2004, Air Canada signed a definitive purchase agreement with Empresa
Brasileira de Aeronautica S.A. ("Embraer") covering firm orders for 45 Embraer
190 series aircraft as well as 15 Embraer 175 series aircraft. The purchase
agreement also contains rights to exercise options for up to 60 additional
Embraer 190 series aircraft as well as providing for conversion rights to other
Embraer models.

         Deliveries of the 15 Embraer 175 series aircraft commenced in July
2005 and the last aircraft was delivered in January 2006. As of the date
hereof, Air Canada had received six 93-seat ERJ 190 aircraft. Thirty-nine
additional Embraer ERJ 190 aircraft under firm order are scheduled for delivery
during the remainder of 2006 and 2007.


Description of Aircraft

Widebody Aircraft

         At December 31, 2005, Air Canada's operating widebody fleet comprised
65 aircraft, configured in two classes of service: Executive First or Executive
Class, and Hospitality Service. The Airbus A340-300 is a four-engine
285-286-seat aircraft that serves Air Canada's trans-Pacific and trans-Atlantic
routes. The Airbus A340-500 aircraft, with 267 seats, is a longer range aircraft
than the A340-300 which currently serves Air Canada's Toronto-Hong Kong route on
a non-stop basis. The Airbus A330-300 aircraft, with 274 seats, is a twin-engine
variant of the Airbus A340-300 that Air Canada operates mainly on trans-Atlantic
routes. The Boeing 767-300 ER is a long-range 203-222-seat aircraft used mainly
on international routes. The Boeing 767-200 is a 207-seat aircraft used on
domestic and international routes.

Narrowbody and Regional Jet Aircraft

         At December 31, 2005, Air Canada operated 136 narrowbody aircraft,
including 109 Airbus narrowbody aircraft. These aircraft are configured in two
classes of service: Executive Class and Hospitality Service (except for the 10
remaining Bombardier regional jets (see Jazz Fleet section), which are only
configured in Hospitality Service). The Airbus A320 aircraft is a 140-seat,
twin-engine aircraft. The twin-engine Airbus A319 offers 120 seats and is
essentially a shortened version of the Airbus A320 aircraft, with the same
engines, operating systems and flight deck. The twin-engine Airbus A321 is the
largest narrowbody aircraft in the Airbus family, with 166 seats. The Embraer
190 and 175 aircraft are 93-seat and 73-seat aircraft with twin-engines. These
large regional jets have lower trip operating costs than conventional narrowbody
aircraft. All of these narrowbody aircraft types primarily serve Air Canada's
domestic and transborder routes.


Trademarks

         The following are some of the key trademarks owned by the Corporation:
Air Canada Jetz(R), Air Canada JazzTM, JazzTM, Destina.ca(R), AcetekTM, Air
Canada Vacations(R), Vacances Air Canada(R), EnRoute(R), Executive First(R),
Executive Class(R), Expedair(R), AC ExpedairTM, AC PriorityTM, AC Air FreightTM,
AC Lynx(R), Hospitality Service(R), Service Hospitalite(R), Rapidair(R), Maple
LeafTM, Feuille d' ErableTM, AC WEBSAVERTM, Super EliteTM and Super EliteTM.
Star Alliance(R) is a trademark of the Corporation and of other members of the
Star Alliance(R) group.


<PAGE>
                                     - 30 -

Other Businesses

Cargo Services

         AC Cargo LP and Air Canada provide Cargo Services on domestic,
transborder and international passenger flights and with dedicated all-cargo
freighter aircraft. AC Cargo LP and Air Canada are Canada's largest providers
of air cargo services as measured by cargo capacity. AC Cargo LP offers Cargo
Services on domestic and transborder flights, utilizing the cargo capacity on
aircraft operated by Air Canada and Jazz on domestic and transborder routes.
Air Canada offers Cargo Services on its international passenger flights and
also uses chartered all freighter aircraft for Canada-Europe and Canada-Asia
services. Cargo Services offered by AC Cargo LP and Air Canada include services
for high priority shipments (AC Expedair and AC Priority) and air freight
services (AC Air Freight) to Air Canada destinations worldwide and Jazz
destinations in North America. Combined, AC Cargo LP and Air Canada provide
direct Cargo Services to over 200 Canadian and international destinations and
have sales representatives in over 50 countries.

         Air Canada's cargo terminal at Pearson International Airport is
equipped with modern cargo handling technology to ensure efficient cargo
handling to meet the needs of customers. Air Canada and AC Cargo LP together are
one of the largest suppliers of air cargo services to Canada Post Corporation.

         Air Canada's freight management system, AC Lynx, offers the visibility
and tools needed to track cargo on-line from initial booking to delivery. Air
Canada, United Airlines and Northwest Airlines, in cooperation with Unisys, are
the founding carriers of the new Cargo Portal Service introduced in 2003.
Endorsed by key freight forwarders globally and their industry associations,
this portal represents a one-stop-shop web tool for air cargo shipping
requirements by offering a large number of services on a growing number of major
air carriers.

Destina eCommerce Group LP

         Destina eCommerce Group LP owns the Destina.ca online travel site and
provides the Internet technology platform that supports the on-line travel site.
In addition, Destina eCommerce Group LP contributes to the development of Air
Canada's on-line distribution strategy and forms an integral part of the
airline's effort to grow its commercial websites worldwide. Destina eCommerce
Group LP's mandate also includes managing and providing operational and
technical support for all of Air Canada's commercial websites, providing travel
industry partners with on-line tools for direct booking, and implementing and
managing future corporate direct booking tools.

         A corporate reorganization involving Destina eCommerce Group LP is
scheduled to occur on May 1, 2006. Pursuant to such corporate reorganization, it
is currently contemplated that the assets of Destina eCommerce Group LP related
to the hotel and car rental booking business previously conducted by it, as well
as its shares in NetTel Assistance Inc. will be transferred to Destina eCommerce
Group General Partner Inc. All other assets and all liabilities of Destina
eCommerce Group LP will be assigned to and assumed by Air Canada.

Touram LP / Air Canada Vacations

         Touram LP conducts business under the trade names Air Canada Vacations.
Air Canada Vacations is a major Canadian tour operator, offering a variety of
leisure vacation package options which include air transportation supplied by
Air Canada and its Star Alliance(R) partners, hotel accommodations, cruises,
Aeroplan Miles and airport transfer/car rentals to popular destinations for
Canadians in the Caribbean, Asia, Central and South America and the United
States, including Las Vegas, Florida and Hawaii. Air Canada Vacations customers
benefit from access to the Star Alliance(R) network as well as the Air Canada
network.

         Netair, a national consolidator that sells surplus seat inventory
aboard Air Canada exclusively to travel agents, is another division of Touram
LP.


<PAGE>
                                     - 31 -


Ground Handling Services

         ACGHS LP (and its United States subsidiary, ACGHS US Inc.) and Air
Canada provide Ground Handling Services to numerous airlines, including major
foreign airlines at Canadian and international airports. These services include
passenger check-in, gate management, baggage and cargo handling and processing,
as well as aircraft ramp services.

                                    AEROPLAN

         ACE currently holds a 75.5% ownership interest in Aeroplan, Canada's
premier loyalty program. Aeroplan provides its commercial partners with loyalty
marketing services to attract and retain customers and stimulate demand for
these partners' products and services. Aeroplan's objective is to offer its
commercial partners superior value relative to other marketing alternatives
through access to Aeroplan's base of members and the design and execution of
marketing programs aimed at increasing revenue, market share, and
customer loyalty. The Aeroplan Program is one of Canada's longest standing
loyalty programs. It was founded in 1984 by Air Canada, to manage the airline's
frequent flyer program. Aeroplan benefits from its unique strategic relationship
with Air Canada in addition to its contractual arrangements with leading
commercial partners including Amex Bank of Canada ("AMEX"), Bell Canada,
Canadian Imperial Bank of Commerce ("CIBC"), Best Buy Canada Ltd., which
operates the Future Shop stores in Canada ("Future Shop"), Imperial Oil (Esso),
Star Alliance(R) member airlines and numerous hotel chains and car rental
companies.

         Aeroplan offers its approximately five million active members the
ability to accumulate Aeroplan Miles throughout its partner network through
purchases of products and services. Aeroplan sells Aeroplan Miles to its
extensive network of over 60 commercial partners, representing over 100 brands,
in the financial services, travel services and consumer products and services
industries. Today, financial services partners generate the majority of
Aeroplan's revenues. In 2005, over 62 billion Aeroplan Miles were accumulated by
members representing an equivalent of approximately $40 billion in consumer
spending to earn these Aeroplan Miles. Once members have accumulated a
sufficient number of Aeroplan Miles, they can redeem such Aeroplan Miles for air
travel and other attractive rewards. Upon the redemption of Aeroplan Miles by
its members, Aeroplan incurs the cost to acquire the desired reward.

         The following charts illustrate the number of Aeroplan Miles issued and
redeemed on an annual basis for the last ten years. The increase in 2001
reflects the integration of Canadian Airlines' frequent flyer program, Canadian
Plus, with the Aeroplan Program. In addition, the charts include 103 billion of
the Aeroplan Miles that were earned by members prior to January 1, 2002, for
which the responsibility to provide air rewards rests with Air Canada.

<TABLE>
<CAPTION>
--------------- ---------------------------------------- -----------------------------------------
     Year        Annual Number of Aeroplan Miles Issued  Annual Number of Aeroplan Miles Redeemed
                         (in billions of miles)                   (in billions of miles)
--------------- ---------------------------------------- -----------------------------------------
<S>  <C>                          <C>                                      <C>
     1996                         23.5                                     11.8
--------------- ---------------------------------------- -----------------------------------------
     1997                         26.8                                     15.5
--------------- ---------------------------------------- -----------------------------------------
     1998                         27.9                                     19.4
--------------- ---------------------------------------- -----------------------------------------
     1999                         35.9                                     22.2
--------------- ---------------------------------------- -----------------------------------------
     2000                         39.3                                     26.3
--------------- ---------------------------------------- -----------------------------------------
     2001                         56.4                                     42.6
--------------- ---------------------------------------- -----------------------------------------
     2002                         54.7                                     41.4
--------------- ---------------------------------------- -----------------------------------------
     2003                         53.2                                     43.0
--------------- ---------------------------------------- -----------------------------------------
     2004                         58.2                                     45.6
--------------- ---------------------------------------- -----------------------------------------
     2005                         62.6                                     52.2
--------------- ---------------------------------------- -----------------------------------------
                          [tabular presentation of graphic displays]
</TABLE>


<PAGE>
                                     - 32 -


Aeroplan's Business Model

         In general terms, Aeroplan's business is based on two major streams of
activity: (i) the sale of Aeroplan Miles and marketing services to Aeroplan's
commercial partners; and (ii) delivering rewards to Aeroplan's members.

Sale of Aeroplan Miles and Marketing Services to Partners

         Aeroplan derives its revenues from the sale of Aeroplan Miles and
marketing services to its commercial partners. The marketing services consist
primarily of advertising, promotion and data analysis. In addition, Aeroplan
derives service fees for managing Air Canada's tier membership program for its
most frequent flyers.

         Members accumulate Aeroplan Miles through their purchase of products
and services from an extensive network of over 60 commercial partners,
representing over 100 brands, in the airline, car rental, consumer products and
services, entertainment, financial services, hotel and telecommunication
industries.

         The gross proceeds received by Aeroplan at the time of the sale of
Aeroplan Miles to its partners, known as "gross billings", are deferred and
recognized by Aeroplan as revenue upon the redemption of Aeroplan Miles for GAAP
purposes, except for breakage as described below. Upon the redemption of
Aeroplan Miles, Aeroplan purchases airline seats or other products or services
in order to deliver the reward chosen by the member. At such time, Aeroplan
incurs and recognizes an expense equal to the cost of the reward, and the
deferred revenue related to the Aeroplan Miles being redeemed is recognized by
Aeroplan as earned revenue from the sale of Aeroplan Miles for GAAP purposes.
The other significant expenses incurred by Aeroplan include call centre expenses
and selling and administrative expenses.

         Based upon past experience, management of Aeroplan anticipates that a
number of Aeroplan Miles sold will never be redeemed by members. This is known
as "breakage" and is presently estimated by management of Aeroplan to be 17% of
current Aeroplan Miles sold. This estimate is supported by two independent
studies conducted in 2004 on behalf of Aeroplan. Prior to 2004, breakage was
estimated to be 19% of the Aeroplan Miles sold. For those Aeroplan Miles that
Aeroplan has estimated will never be redeemed by members, Aeroplan recognizes
revenue on a straight-line basis over the average time between the issuance and
redemption of an Aeroplan Mile, referred to as the estimated life of an Aeroplan
Mile, currently 30 months.

         Management of Aeroplan believes that the issuance and redemption of
Aeroplan Miles are influenced by the nature and volume of commercial partners,
the types of rewards offered, the general economic activity level and the
activity level of competing loyalty marketing programs. These influences could
affect redemption and breakage rates. As of December 31, 2005, Aeroplan had
approximately $1.3 billion in deferred revenue that will be recognized for GAAP
purposes in the future upon the redemption of outstanding unredeemed Aeroplan
Miles.

         On an ongoing basis, the total estimated redemption cost for
outstanding Aeroplan Miles is determined by Aeroplan as the product of (i) total
outstanding number of unredeemed Aeroplan Miles on a specific measurement date
net of estimated breakage, and (ii) the average unit cost per Aeroplan Mile
redeemed in the period. Given that the future unit cost per Aeroplan Mile
redeemed may fluctuate, the future redemption cost liability is periodically
reevaluated using the average unit cost per Aeroplan Mile redeemed in the most
recent period.

         Service fees are charged for the sale of marketing services to
Aeroplan's partners and for the management of Air Canada's frequent flyer tier
membership program. In addition, Aeroplan collects various fees that may be
charged to members upon redemption of Aeroplan Miles, including booking, service
and administrative fees.

Redemption Rewards

         Once members have accumulated a sufficient number of Aeroplan Miles,
members are entitled to redeem their Aeroplan Miles from Aeroplan's reward
portfolio. Initially, these rewards were restricted to air travel. Beginning in
2003, Aeroplan made a strategic shift to expand the reward portfolio in order to
directly respond to all key areas of interest of the membership. By 2005, in
addition to air travel on Air Canada, Jazz and the Star Alliance(R) carriers,
the reward portfolio now includes worldwide car and hotel rewards, a broad
selection of brand


<PAGE>
                                     - 33 -



name merchandise, unique experiential rewards, electronics from Future
Shop, and gift cards from a network of over 20 well known national retailers
such as Gap, The Body Shop, Holt Renfrew, Pier One, Blockbuster,
Williams-Sonoma, Pottery Barn, Linens `n Things, Birks and The Running Room.
Member response has been consistently positive to the increasing choice and
value the new rewards offer, and demand for these rewards has increased
significantly each year since 2003.

         Air travel remains the most popular reward among members, representing
approximately 90% of all rewards claimed by Aeroplan members in 2005. Aeroplan
has issued nearly ten million air travel rewards over the last ten years, and
over 1.3 million in 2005 alone.

Commercial Partners

         Aeroplan attracts and retains commercial partners based on the value of
its member base as a target market, the loyalty demonstrated by Aeroplan members
with their sustained purchases of partners' products and services, and a
portfolio of value-added marketing services.

         Today, Aeroplan has commercial relationships with over 60 leading
companies, representing over 100 brands, which can be divided into three main
categories:

         o  financial services partners;

         o  travel services partners; and

         o  consumer products and services partners.

         The charts below illustrate gross billings in 2004 and 2005 from the
sale of Aeroplan Miles by category of partners.

<TABLE>
<CAPTION>

    2004 GROSS BILLINGS BY KEY SEGMENTS                                2005 GROSS BILLINGS BY KEY SEGMENTS
            [Pie Graph Omitted]                                                [Pie Graph Omitted]

<S>                      <C>                                          <C>                        <C>

Consumer Products        Air Canada & Jazz                         Consumer Products         Air Canada & Jazz
   and Other                    27%                                   and Other                     27%
      2%                                                                 4%


Financial Services     Other Travel Services                       Financial Services      Other Travel Services
       63%                       8%                                       62%                        7%

</TABLE>


Redemption Rewards

         Once members have accumulated a sufficient number of Aeroplan Miles,
members are entitled to redeem their Aeroplan Miles from Aeroplan's reward
portfolio, which includes air travel, car rentals, hotel stays, vacation
packages, brand name merchandise, gift certificates, and unique experiential
rewards.

<PAGE>
                                     - 34 -




Airline Seat Rewards

         Aeroplan has entered into long-term agreements for the purchase of
airline seat capacity with Air Canada and many of the other Star Alliance(R)
member airlines. Such agreements enable Aeroplan to offer its members access to
an extensive and worldwide source of airline travel rewards. In 2005,
approximately 90% of rewards claimed by Aeroplan members were air travel
rewards.

         Prior to 2004, 10% of the seat capacity on AC Flights (as defined
below) was allocated for Aeroplan rewards. Since April 2004, such allocation
has been increased to a total of 15% of the capacity on flights operated by Air
Canada and its affiliate, Jazz, and certain other air carriers under the "AC"
code (collectively, the "AC Flights"), 8% of which is at a fixed low redemption
cost and the balance of 7% is at a higher fixed redemption cost. The rates
charged for such seat capacity are fixed through the end of 2007. Thereafter,
any upwards or downwards adjustments to such rates must maintain aggregate
discounts at least as favourable to Aeroplan as those set out in the current
rates. The adjustments are also based on an identified set of parameters.
Through recently completed arrangements with Air Canada to be implemented in
2006 or early 2007, Aeroplan will have access to unlimited seat capacity on AC
Flights. Under the new arrangements, Aeroplan will continue to have access to
8% of the seat capacity at a fixed low redemption cost (subject to adjustments
described above) and can purchase additional inventory based on published fares
with a variable discount depending on the fare type. Any adjustments to this
variable discount are based on an identified set of parameters. The CPSA (as
defined below) also provides that Aeroplan will be charged the lowest fares
charged to any other loyalty program and such fares will take into account
Aeroplan's status as the largest consumer of Air Canada's seat inventory. These
new arrangements will allow Aeroplan to provide its members with greater access
to air travel rewards. To reflect the cost of the additional seats acquired,
Aeroplan may adjust the number of Aeroplan Miles required to claim air travel
rewards under the new arrangements.

         Aeroplan also provides its members with access to an extensive and
world-wide source of airline travel rewards through contractual arrangements
between Aeroplan and the Star Alliance(R) member airlines, at competitive rates
to Aeroplan. During the year ended December 31, 2005, Aeroplan members booked
over 750,000 seats on Star Alliance(R) member airlines.

Other Travel Rewards

         In October 2005, Aeroplan significantly expanded its portfolio of
complementary travel rewards with the launch of a fully redesigned online
redemption tool and the addition of seven new partner brands. Hotel rewards are
now available worldwide from Delta Hotels, Sheraton Hotels & Resorts, Westin
Hotels & Resorts, Four Points by Sheraton, W Hotels, St. Regis and The Luxury
Collection. Rewards start at 9,000 Aeroplan Miles for a one-night hotel stay.
Car rental rewards have been expanded to include Avis and Hertz locations around
the world, and can be fully booked online at www.aeroplan.com using industry
leading technology. Car rental rewards start at just 5,000 Aeroplan Miles for a
one day rental. Also in 2005, and in conjunction with Air Canada Vacations,
Aeroplan added various Disney resort packages to its wide variety of vacation
packages available for reward redemption.

Indulgence Rewards

         In 2005, Aeroplan regrouped all of its non-travel reward offerings
under the Indulgence Rewards banner. A new consolidated online reward catalogue
features over 300 rewards that include the latest in electronics from Future
Shop, a broad selection of brand name merchandise, unique experiential rewards,
and gift cards from a network of over 20 well known national retailers such as
Gap, The Body Shop, Holt Renfrew, Pier One, Blockbuster, Williams-Sonoma,
Pottery Barn, Linens `n Things, Birks and The Running Room.

         This portfolio of rewards is the largest diversified group of rewards
ever offered by Aeroplan and is one of the most extensive in the Canadian
loyalty marketing sector. The portfolio is designed to directly respond to
members' interests for reward opportunities, while ensuring broad affordability,
with new rewards added every month. Rewards beyond air travel are available
online only exclusively at www.aeroplan.com. Member response to the 2005
expansion of the reward portfolio and redesigned user experience has been
consistently positive, with the demand for these rewards having significantly
increased compared to the previous year.


<PAGE>
                                     - 35 -



Members

Membership

         Aeroplan has approximately five million active members, consisting of
those members who have completed at least one transaction (either accumulating
or redeeming an Aeroplan Mile) during the last three years.

Communications to Members

         Regular communication with individual members through newsletters,
monthly statements and periodic special mailings is a cornerstone of the
Aeroplan Program. Subsequent to the completion of a study in 2003 and 2004 on
the effectiveness of its member communications, Aeroplan's portfolio of member
communications and its list of strategic suppliers were revised to offer members
more choice in channels, more flexible tools and increased potential for highly
targeted and relevant messages.

         These changes to Aeroplan's communications strategies have resulted in
significant cost and time savings. Nearly two million members now receive
statements and other information from Aeroplan by electronic mail.

Operations

Member Segmentation and Data Analysis

         Aeroplan develops member segmentation models using its members'
purchasing behaviour data. The current model identifies six categories of
members based on key behavioural indicators including flying patterns,
accumulation sources and rate, tenure in the Aeroplan Program and other factors.
The information emerging from the model drives Aeroplan's communications with
its members which have become more relevant and meaningful to members.
Aeroplan's capacity to provide targeted communications presents a value-added
marketing tool to its commercial partners at competitive rates to alternative
mass media.

Member Servicing and Distribution

         Prior to 2002, Aeroplan rewards were exclusively distributed through
call centres. Since then, other channels have been developed and distribution is
now handled through a combination of call centres and Aeroplan's Internet site
www.aeroplan.com. Aeroplan is introducing an automated speech platform which
will improve self-service functionality. The introduction of the speech platform
commenced in December 2005 and is expected to be fully implemented by the end of
2006. These channels provide Aeroplan with an effective distribution strategy
that offers its members a variety of options when redeeming rewards.

Systems and Infrastructure

         Aeroplan's technology organization consists of skilled individuals with
strong business knowledge. While project management, systems analysis, strategy
and architecture functions are performed internally, Aeroplan relies on external
technology partners to perform systems operations and applications development.
All systems and infrastructure are designed to safeguard and protect Aeroplan's
members' data from unauthorized access, use or disclosure.


Long-Term Strategic Relationship with Air Canada

         Aeroplan has a long-term strategic relationship with Air Canada,
Canada's largest domestic and international full-service airline.

         Management believes that Aeroplan's strategic relationship with Air
Canada results in several competitive advantages to Aeroplan, including:

         o    an affiliation with the strong Air Canada brand;

<PAGE>
                                    - 36 -

         o    being Air Canada's exclusive loyalty marketing provider based in
              Canada;

         o    attractive rates for seat capacity on the Air Canada and Jazz
              networks based on Aeroplan's status as Air Canada's largest
              customer; and

         o    access to Air Canada's passengers for the purposes of acquiring
              new Aeroplan members.

         Aeroplan is a party to the following five major agreements with Air
Canada: (i) an Amended and Restated Commercial Participation and Services
Agreement dated June 9, 2004, as amended, including by the agreements dated May
13, 2005 (the "CPSA"); (ii) a Database Agreement dated May 13, 2005, effective
January 1, 2002; (iii) an Amended and Restated Master Services Agreement dated
May 13, 2005, effective January 1, 2005; (iv) a General Services Agreement dated
May 13, 2005, effective January 1, 2005; and (v) a Trademark License Agreement
dated May 13, 2005. A full description of these agreements appears under the
heading "The Aeroplan Business - Long-Term Strategic Relationship with Air
Canada" in the 2006 Annual Information Form of Aeroplan Income Fund. The 2006
Annual Information Form of Aeroplan Income Fund is available on SEDAR at
www.sedar.com.


Competition

         Aeroplan generally competes with other forms of marketing services,
including advertising, promotions and other loyalty incentives, both traditional
and on-line, for a portion of a client's total marketing budget. In addition,
Aeroplan competes against proprietary loyalty programs developed by Aeroplan's
existing and potential commercial partners. Aeroplan's principal competitors in
Canada include the Air MilesTM program, frequent flyer programs operated by
airlines and the loyalty programs operated by consumer products and services
retailers, financial services institutions and gasoline retailers.

         For each of Aeroplan's marketing services, Aeroplan expects competition
to intensify as more competitors enter its market. In addition, competitors of
the Aeroplan Program may target its commercial partners and members as well as
draw rewards from Aeroplan's redemption rewards suppliers. Aeroplan's ability to
generate revenue from commercial partners will depend on its ability to
differentiate itself through the products and services it offers and the
attractiveness of its Aeroplan Program to consumers. The continued
attractiveness of the Aeroplan Program will depend in large part on its ability
to remain affiliated with commercial partners that are valuable to consumers and
to offer rewards that are both attainable and attractive to consumers.
Intensifying competition will make it more difficult for Aeroplan to accomplish
this. For Aeroplan's database marketing services, its ability to continue to
capture detailed transaction data on consumers is critical in providing
effective customer relationship management strategies for Aeroplan's commercial
partners.


Logos and Trademarks

         Aeroplan(R), Aeroplan(R), Aeroplan Design(R), Aeroplan Design(R),
AeroCorporate(R), AeroEntreprise(R), Aeroplan Plus(R), Aerogold(R) and Aero
Or(R) are registered trademarks owned by Aeroplan in Canada. Aeroplan also owns
additional trademarks in connection with its loyalty marketing business. Air
Canada has granted Aeroplan LP a license to use the Air Canada(R) and Air Canada
Roundel(R) trademarks around the world solely in association with the Aeroplan
Program. Aeroplan Income Fund has been granted a license to use the Aeroplan(R),
Aeroplan(R), Aeroplan Design(R) and Aeroplan Design(R) trademarks in Canada.

         Aeroplan's intangible assets are an important part of its business.
Aeroplan benefits from the goodwill established for the Aeroplan brand name.
Aeroplan protects its proprietary information, including its trademarks and
database, through trademark laws, contractual provisions and confidentiality
procedures. Employees, service providers and partners are contractually bound to
protect Aeroplan's proprietary information in order to control access to and the
distribution of any such information.
<PAGE>

                                    - 37 -


                                     JAZZ

         Jazz forms an integral part of Air Canada's domestic and transborder
market presence and strategy. Under the CPA with Air Canada, Jazz provides
service to and from lower density markets as well as higher density markets at
off-peak times throughout Canada and to and from certain destinations in the
United States.

         Jazz is the focal point of Air Canada's regional passenger strategy,
providing Air Canada with approximately 96% of its regional airline capacity
based on ASMs. Jazz and Air Canada have linked their regional and mainline
networks in order to serve connecting passengers more efficiently and to provide
valuable traffic feed to Air Canada's mainline routes. Jazz's operations also
complement Air Canada's operations by allowing more frequent service in lower
density markets than could be provided economically with conventional large jet
aircraft.

         Jazz's business model was transformed upon the emergence of Air Canada
and Jazz from the CCAA by virtue of the implementation of significant cost
reductions, the introduction of new regional jet aircraft and the entering into
of the Initial CPA which was in effect from September 30, 2004 to December 31,
2005. The Initial CPA was replaced with the CPA effective January 1, 2006
between Air Canada and Jazz.


Capacity Purchase Agreement with Air Canada

         Pursuant to the CPA, Air Canada purchases capacity from Jazz on Jazz's
aircraft which are subject to the CPA (the "Covered Aircraft") in consideration
for the payment of certain fees by Air Canada to Jazz. During the period from
October 1, 2004 to December 31, 2005, Jazz derived substantially all of its
revenues (99%) from the Initial CPA. Management expects this to continue under
the CPA.

         All of the 121 aircraft in Jazz's operating fleet as of December 31,
2005 are Covered Aircraft under the CPA except for one Dash 8-100 aircraft being
used for charter purposes. Of the 135 aircraft scheduled to make up Jazz's
operating fleet by July 2006, 133 aircraft will be Covered Aircraft under the
CPA and the remaining two aircraft (Dash 8s) are scheduled to be used for third
party charter purposes. Pursuant to the CPA, Air Canada purchases capacity from
Jazz representing substantially all of the capacity of the Covered Aircraft. In
addition, the current 2006 - 2008 high level operating plan provided by Air
Canada to Jazz for rate setting purposes only (the "2006 - 2008 High Level
Operating Plan") provides for Air Canada to continue to purchase substantially
all of the capacity of the Covered Aircraft for such period. The 2006 - 2008
High Level Operating Plan is subject to annual and seasonal (twice-a-year)
revisions.

         Notwithstanding any revisions to the 2006 - 2008 High Level Operating
Plan, Air Canada has agreed to pay Jazz for certain daily minimum levels of
operating capacity based on aircraft type and calculated in terms of a minimum
number of minutes elapsing from the time the chocks are removed from the wheels
of an aircraft until the chocks are next again returned to the wheels of the
aircraft, divided by 60 (the "Block Hours") for each Covered Aircraft other than
aircraft being modified, undergoing schedule maintenance or being painted (the
"Active Aircraft") until the expiry of the CPA in December 2015. The minimum
average daily utilization guarantee for the 2006 calendar year represents
approximately 86% of the estimated Block Hours currently scheduled to be flown
by Jazz's Covered Aircraft during such period, as contemplated in the 2006
annual operating plan provided by Air Canada to Jazz for budget and planning
purposes only (the "2006 Annual Operating Plan").

         Under the CPA, Jazz operates flights on behalf of Air Canada using the
Covered Aircraft, and provides all crews (flight and cabin), aircraft
maintenance and, in some cases, airport operations for such flights (the
"Scheduled Flights"). Air Canada determines routes and controls scheduling,
ticket prices, product distribution, seat inventories, marketing and advertising
for these flights. Air Canada is entitled to all revenues (except bar and buy-on
board sales) resulting from the Scheduled Flights and from cargo services
carried on Scheduled Flights including, without limitation, ticket sales,
baggage charges, passenger charges and employee pass travel service charges.

         In addition to being reimbursed for all pass-through costs, as defined
in the CPA, Jazz is paid fees by Air Canada on a variety of different metrics
based on an estimate of all costs and expenses to be incurred and paid by Jazz
for the applicable period with respect to Scheduled Flights and other services
to aircraft, other than Jazz's pass-through costs (the "Controllable Costs"),
marked-up by a specified percentage. Such mark-up equates to a specified margin
on Jazz's estimated Scheduled Flights Revenue (as defined in the CPA) for each
calendar year in the

<PAGE>
                                    - 38 -


applicable period. The fees payable by Air Canada to Jazz on a monthly
basis are broken down into a number of categories. These payment categories
fall into two broad groups: there are those that are variable depending on the
Covered Aircraft utilization and those that remain unchanged regardless of how
often or where or with what load factors the Covered Aircraft are utilized.

         The most important of the variable payments for establishing Jazz's
revenue is the Block Hour payment paid by Air Canada for each Block Hour flown
by Jazz's Covered Aircraft. This payment varies with the Block Hours flown. The
other variable payments such as the cycle payment and, even more so, the
passenger payment, are relatively small and calibrated to cover the specific
costs associated with the activity (either a cycle or flying a passenger) to
which they are linked. The other group of payments such as aircraft rent do not
change regardless of the Covered Aircraft's utilization and are designed to meet
Jazz's costs for these items plus a mark-up.


Scope Clause

         Scope clauses are an industry norm for network airlines operating in
conjunction with regional carriers and are usually found in collective
agreements of pilot union groups. Jazz, like many regional airlines, is
restricted by scope provisions in the collective agreement between Air Canada
and the Air Canada Pilots Association ("ACPA"). Prior to the CCAA restructuring,
Jazz's operations were limited by scope provisions restricting Jazz's operations
to 39 55-seat regional jet aircraft including ten grandfathered BAe-146
aircraft, which have since been retired. The scope provisions in place at the
time also required that growth beyond the 39 55-seat regional jet aircraft could
only take place with growth in the Air Canada fleet.

         As a result of the CCAA process, a unique arrangement was reached
between Air Canada, Jazz, ACPA and the Air Line Pilots Association ("ALPA"). The
agreement, known as the Small Jets Settlement Agreement, modifies the existing
scope clauses, provides a process to allocate the current orders of regional
jets between Air Canada and Jazz, determines the types and number of jets that
can be flown by Jazz and provides mechanisms for resolving disputes over future
regional jet additions to either fleet. There are no limits to the number of
turboprop aircraft that Jazz may operate.

         The Small Jets Settlement Agreement provides that:

         (i)      Jazz may maintain a fleet of 50 CRJ-100s/200s and 15 CRJ-705s
                  made up as follows: (i) ten CRJ-100s, 15 CRJ-200s and 15
                  CRJ-705s, and (ii) 25 CRJ-100s originally operated by Air
                  Canada, of which 15 have already been transferred to Jazz as
                  of December 31, 2005, with the remaining ten expected to be
                  transferred by July 2006.

         (ii)     If either Air Canada or Jazz seeks to increase the fleet
                  beyond what is outlined above, they must notify ACPA and ALPA
                  in writing of the proposed increase and then meet with ACPA
                  and ALPA to discuss and, if possible, agree on the increase
                  and any terms in connection therewith. Where no agreement is
                  reached, the matter is referred to an arbitrator or a mediator
                  who will then make a decision, taking into account the
                  business case put forward by the respective parties and the
                  impact of the matter at hand on the respective pilots groups.

         (iii)    Jazz may not operate the CRJ-705 aircraft if configured
                  in excess of 75 seats, inclusive of all classes.

         (iv)     As was previously the case, Air Canada must ensure that a
                  minimum of ASMs is flown by Air Canada compared to the ASMs
                  flown by Jazz.

         Air Canada is scheduled to transfer to Jazz 25 CRJ-100s originally
operated by Air Canada, of which 15 have already been transferred to Jazz as of
December 31, 2005, and the remaining ten by July 2006. ACPA has filed a
grievance under its collective agreement with Air Canada challenging the timing
of the transfer of such 25 CRJ-100s from Air Canada to Jazz prior to the
inclusion of the Embraer ERJ-190 aircraft into the Air Canada fleet which
commenced in December 2005. Air Canada has informed ACPA that it believes that
this matter should be resolved through binding arbitration under the Small Jets
Settlement Agreement. Although the outcome of the arbitration or the grievance
resolution procedure cannot be determined with certainty, based on previous
arbitrations relating to the deployment of aircraft at Jazz, Management of Jazz
expects that the current schedule for the transfer of the 25 CRJ-100s should
not be affected.


<PAGE>
                                    - 39 -

Competition

         As Canada's only nationwide regional airline and as the only regional
carrier in Canada operating regional jets, Jazz enjoys a unique position in the
Canadian regional airline market. All other carriers in the Canadian regional
airline market are smaller operators of turboprop aircraft, most of which
operate aircraft in the 19 to 50 seats range. These carriers are primarily
stand-alone operations, operating in niche markets. Few other regional airlines
in Canada operate under capacity purchase agreements, and those who do have
relationships with Air Canada for turboprop aircraft with less than 19 seats.
All of these carriers are privately held or family-run companies. None of these
carriers approach the size and scope of operation of Jazz as their fleets range
from one to 12 aircraft. Low-cost carriers, including WestJet and Canjet, also
compete with Air Canada on certain routes in Canada operated by Jazz.

         On transborder markets, Air Canada and Jazz compete against a variety
of United States network airlines and their regional carriers, most of whom
operate under capacity purchase agreements with various major United States
network airlines. These carriers operate under their capacity purchase agreement
partner brands such as United Express, America West Express, US Airways Express,
Continental Express, Northwest Airlink, Delta Connection, American Eagle and
Horizon Airlines.


Jazz Fleet

         The Jazz operating fleet at December 31, 2005 and the planned operating
fleets for 2006 to 2008 are shown below:

<TABLE>
<CAPTION>
                       Number of Operating         Planned Operating          Planned Operating         Planned Operating
                     Aircraft as at December    Aircraft as at December    Aircraft as at December   Aircraft as at December
                            31, 2005(4)                31, 2006                   31, 2007                   31, 2008
                    --------------------------------------------------------------------------------------------------------
<S>                             <C>                       <C>                        <C>                        <C>
CRJ-100/200(1)(2)(3)            42                        58                         58                         58
CRJ 705                         15                        15                         15                         15
Dash-8-300                      26                        26                         26                         26
Dash-8-100                      38                        36                         36                         36
                    --------------------------------------------------------------------------------------------------------
Total                          121                       135                        135                        135
                    --------------------------------------------------------------------------------------------------------
</TABLE>

_________________

(1)  Excludes four aircraft which were delivered by December 31, 2005, but are
     not yet in active service and thus not shown as operating aircraft.
(2)  15 Bombardier CRJ-100 aircraft were transferred from Air Canada's fleet to
     Jazz's fleet in 2005 and the remaining 10 Bombardier CRJ-100 aircraft are
     expected to be transferred by July 2006.
(3)  During 2005, Air Canada leased an additional eight CRJ-200 aircraft from an
     aircraft lessor. These aircraft were delivered to Jazz starting in 2005 and
     as of the date hereof, Jazz has received all eight aircraft.
(4)  As of March 1, 2006, Jazz had 129 operating aircraft and two aircraft
     which had been delivered to Jazz but were not yet in active service.


Bombardier

         In 2004, Air Canada signed a definitive purchase agreement with
Bombardier Inc. ("Bombardier") for the acquisition of regional jet aircraft. The
agreement with Bombardier covered firm orders for 15 Bombardier CRJ705 and 15
Bombardier CRJ200 aircraft, all of which were delivered to the Corporation
between late 2004 and January 2006. The agreement with Bombardier contains
orders for 15 additional Bombardier CRJ200 aircraft which can be cancelled
without penalty. The agreement also contains options for an additional 45
aircraft.


Description of Aircraft

Regional Jet and Turboprop Aircraft

         At December 31, 2005, Jazz operated 57 regional jet aircraft and Air
Canada operated 10 regional jet aircraft. The 50-seat Bombardier CRJ-100/200 is
a twin engine regional jet aircraft designed to provide superior

<PAGE>
                                    - 40 -


performance and operating efficiencies for the regional airline industry. The
50-seat Bombardier CRJ-100/200 is used primarily to serve lower density
markets on routes of less than 1,000 miles, and to serve larger markets at
"off peak" times. These aircraft are also used in selected "point-to-point"
markets, transborder markets, and to develop selected domestic markets. The
75-seat Bombardier CRJ-705 feature leather seats and are configured into 10
Executive Class seats and 65 Hospitality Class seats. The CRJ-705 is an
economical aircraft due to its operational efficiencies and lower trip costs.

         As at December 31, 2005, Jazz operated 64 Bombardier Dash-8 aircraft.
The Dash 8-100 is a twin engine turboprop medium range aircraft with seating
capacity of 37 passengers. The 50-seat Bombardier Dash 8-300 has advanced
turboprop characteristics that approach those of a jet aircraft. Turboprop
aircraft continue to serve certain segments of the Canadian domestic market more
efficiently than regional or larger jet aircraft. On short-haul routes with
lower traffic volumes, turboprops often present the most economical and
efficient way to serve these markets. Compared with larger jet aircraft, the
turboprop is more profitable to operate on shorter routes with low levels of
passenger demand due to its generally lower break-even passenger load factor.


Trademarks

         Air Canada has granted Jazz a license to use the Air Canada JazzTM,
JazzTM, Air Canada(R), Air Canada Design(R), Air Canada and Design(R) and other
trademarks in Canada and the United States in association with the provision of
scheduled airline services in regions of Canada and across the Canada -- United
States border. Jazz also owns additional trademarks in connection with its
regional airline business.


                                      ACTS

         ACTS LP is a full service MRO organization that competes on a global
basis. ACTS LP offers the following MRO services in its portfolio:

         1.  Airframe services;

         2.  Engine and auxiliary power unit (APU) services;

         3.  Component services; and

         4.  Specialized services, including aircraft painting, cabin
             conversions and modifications, engineering, fleet management,
             non-destructive testing, regulatory compliance and airworthiness,
             supply chain management, technical training, technical records
             management, and technical publications.

         The major maintenance facilities for ACTS LP are located in Montreal,
Vancouver, Winnipeg and Toronto.

         ACTS LP provides MRO services for Air Canada and other airline
customers worldwide. ACTS LP has currently over 100 customers, including Air
Canada, Department of National Defence, Delta Air Lines, JetBlue Airways, Jazz,
US Airways, Air Norterra, Air Transat, Chromalloy Gas Turbine, USA 3000,
Skyservice Airlines, ABX Air, Hartford Aviation, Mexicana, Lufthansa CityLine,
Snecma Services, Pratt & Whitney, British West Indies Airways (BWIA), Air
France, KLM, United Airlines, and Comair.

         In addition, ACTS LP secured a new market niche of aircraft lessors,
including GECAS (GE Capital Aviation Services), ILFC (International Lease
Finance Corporation), and RBS (Royal Bank of Scotland).

         ACTS LP has a highly skilled and experienced workforce. During CCAA,
the restructuring process allowed ACTS LP to implement important labour costs
reductions resulting from higher productivity, a rationalized workforce, and
lower average salaries. ACTS LP has the ability to significantly increase its
business volume with its current infrastructure and facilities. The
Corporation's strategy is to continue to leverage ACTS LP's unused capacity by
developing relationships with third party customers, especially American
carriers that have recently started to outsource their maintenance work.
<PAGE>
                                    - 41 -


         Increasingly, many airlines and leasing companies prefer to deal with a
single MRO provider that has the expertise necessary to manage all of their MRO
work, including airframe overhauls, component and engine repairs, and
specialized services. ACTS LP is positioning itself to pursue a greater market
share by profitably providing value-added full-service integrated maintenance
solutions that offer continuous cost improvement to its airline customers.

         During its first full year of operations in 2005, ACTS LP continued to
focus on increasing its customer base and developing into a stand-alone MRO.
During this period of growth, financial results were impacted due to greater
than expected operational challenges relating to significant production capacity
growth at ACTS's Montreal and Vancouver airframe maintenance centers. These
operational challenges required the integration of additional staff and new
customer processes.

         ACTS LP's strategy going forward is centered on the following pillars:

(i)           Operational excellence: Implement systems and processes to provide
              agility and flexibility to meet customer demands.

(ii)          Profitability: ACTS LP is continuing to develop its profitable
              business model to reduce costs and generate cash while focusing on
              its operations, turnaround times, productivity, processes, and
              systems.

(iii)         Growth: Establish a greater global presence through possible
              partnerships, joint ventures, or acquisitions.

(iv)          Customer Experience: Become a "virtual extension of the customers"
              by delivering products and services that consistently exceed
              expectations and ensure satisfaction and loyalty.

(v)           Safety, Quality and Reliability: Continuously strive to improve
              safety, quality and reliability in the workplace.

<PAGE>

                                      - 42 -


                                    EMPLOYEES

         In 2003 and 2004, the Corporation concluded long-term collective
agreements with all union groups which expire in 2009. These collective
agreements provide for a process to revise wage levels in 2006 by negotiation
or, failing negotiation, by mediation or arbitration without resort to strike or
lock-out.

         With respect to non-unionized employees, workforce reductions occurred
in some areas in 2005 and 2006. Further non-unionized reductions have been
announced and are planned to occur in 2006.

         In the fourth quarter of 2005, the Corporation had an average of 33,090
full-time equivalent ("FTE") employees compared to an average of 31,991 FTE
employees in the fourth quarter of 2004. This reflects a 3% increase from the
fourth quarter of 2004, as shown in the table below:

<TABLE>
<CAPTION>

                                                Union             Fourth          Fourth                     %
                                                               Quarter 2005    Quarter 2004    Change     Change
                                         ---------------------------------------------------------------------------
<S>                                      <C>                       <C>             <C>          <C>           <C>

Transportation Services
Management & Administrative Support                                3,565           3,523         42           1
Pilots                                   ACPA                      2,541           2,563       (22)         (1)
Flight Attendants                        CUPE                      6,010           5,837        173           3
Customer sales & Service Agents          CAW / IBT                 3,927           3,942       (15)         (0)
Technical Services, Ramp & Cargo         IAMAW                     6,924           6,775        149           2
UK Unionized employees                   AMICUS / TGWU               682             749       (67)         (9)
Other unionized                                                      528             494         34           7
                                                              ------------------------------------------
Transportation Services total (1)                                 24,177          23,883        294           1

Aeroplan                                                           1,057           1,185      (128)        (11)

Jazz(2)                                                            3,801           3,363        438          13

ACTS LP                                                            4,055           3,560        495          14

                                                              ------------------------------------------
Total                                                             33,090          31,991      1,099           3
                                                              -------------------------------------------------------
</TABLE>

_______________________

(1)  Transportation Services includes the following FTEs: Air Canada 15,414; AC
     Cargo LP 1,223; ACGHS LP 7,038; Air Canada Vacations 441; Other 61.
(2)  Includes unionized and non-unionized employees.


                                  RISK FACTORS

         A discussion of risks affecting the Corporation and its business
appears under the heading "Risk Factors" in the 2005 Management's Discussion and
Analysis of ACE which is incorporated by reference herein. The 2005 Management's
Discussion and Analysis is available on SEDAR at www.sedar.com.

<PAGE>

                                    - 43 -



                              MARKET FOR SECURITIES

         The Variable Voting Shares and the Voting Shares are traded on the
Toronto Stock Exchange under the trading symbols "ACE.RV" and "ACE.B",
respectively. On May 8, 2006, the trading symbol for the Variable Voting Shares
is expected to change from ACE.RV to ACE.A. The following table sets forth the
price range and trading volume of the Variable Voting Shares and the Voting
Shares as reported by the Toronto Stock Exchange for the months of January to,
and including, December 2005:

<TABLE>
<CAPTION>

                             Variable Voting Shares                                   Voting Shares
                ------------------------------------------------     --------------------------------------------------
                                        Average                                                  Average
                                         Daily          Total                                     Daily        Total
                                        Trading        Monthly                                   Trading      Monthly
    2005         High        Low         Volume        Volume          High         Low          Volume       Volume
    ----         ----        ---         ------        ------          ----         ---          ------       ------
<S>             <C>         <C>          <C>         <C>              <C>          <C>            <C>       <C>
January.........$36.41      $32.10       710,057     14,201,149       $36.50       $32.10         90,607    1,812,130
February........$35.50      $32.10       249,484      4,989,675       $35.52       $32.25        103,437    2,068,734
March...........$38.50      $31.25     1,189,653     26,172,368       $38.83       $31.25        219,651    4,832,331
April...........$38.78      $33.90       758,670     15,932,076       $38.77       $34.00        139,252    2,924,291
May.............$40.00      $33.00     1,097,700     23,051,710       $39.90       $33.00        126,400    2,654,406
June............$43.03      $37.90     1,270,907     27,959,964       $43.00       $37.85        198,734    4,372,149
July............$41.25      $37.76       603,348     12,066,958       $41.22       $37.80        161,186    3,223,717
August..........$40.25      $35.70       627,562     13,806,369       $40.29       $35.66        109,538    2,409,838
September.......$40.15      $34.02       918,105     19,280,204       $40.10       $34.00        235,536    4,946,250
October.........$35.70      $30.25       675,806     13,516,113       $35.65       $30.29        141,324    2,826,476
November........$39.96      $30.81     1,200,059     26,401,298       $40.01       $30.85        601,866   13,241,041
December........$39.50      $36.60       413,394      8,267,874       $39.51       $36.45        137,286    2,745,721
</TABLE>


         The Notes are traded on the Toronto Stock Exchange under the trading
symbol "ACE.NT.A". The following table sets forth the price range and trading
volume of the Notes as reported by the Toronto Stock Exchange for the months of
March to, and including, December 2005:

<TABLE>
<CAPTION>
                                                                    Notes
                          --------------------------------------------------------------------------------------

                                                                   Average Daily Trading             Total
       2005(1)                 High                 Low                   Volume                  Monthly Volume
----------------------    ------------         --------------      ---------------------          --------------
<S>                          <C>                   <C>                    <C>                       <C>
March...............         $101.35               $100.65                252,810                   252,810

April...............         $101.00               $96.70                  24,102                   506,150

May.................         $101.00               $93.50                   8,292                   174,122

June................         $105.40               $98.47                  16,701                   367,430

July................         $103.25               $99.00                   5,279                   105,570

August..............         $101.00               $98.00                  10,797                   237,530

September...........         $101.75               $95.50                  13,008                   273,170

October.............          $96.10               $90.99                   3,213                    64,250

November............         $100.75               $93.00                   9,895                   217,700

December............         $100.00               $96.67                   7,391                   147,810
</TABLE>

____________________

(1) The Notes began trading on the Toronto Stock Exchange on March 31, 2005.


<PAGE>
                                    - 44 -


                                 DIVIDEND RECORD

         The Corporation has not paid dividends on its Voting Shares, Variable
Voting Shares or Preferred Shares for the year ended December 31, 2005.


                        DESCRIPTION OF CAPITAL STRUCTURE

         The share capital of ACE is composed of an unlimited number of Variable
Voting Shares and Voting Shares and of 12,500,000 Preferred Shares. In addition,
ACE has issued debt securities in the form of Notes. The following summary
describes the rights, privileges, restrictions and conditions that are attached
to the Variable Voting Shares, Voting Shares and Preferred Shares, and includes
a description of the Notes and the ratings ascribed to them. This summary does
not purport to be complete and is subject to, and is qualified in its entirety
by, reference to the terms of the ACE Articles of Arrangement.


Variable Voting Shares

Voting

         The holders of the Variable Voting Shares shall be entitled to receive
notice of, and to attend and vote at, all meetings of the shareholders of ACE,
except where the holders of a specified class are entitled to vote separately as
a class as provided in the CBCA.

         The Variable Voting Shares may be held only by persons who are not
Canadians (as such term is defined in the Canada Transportation Act) and are
entitled to one vote per Variable Voting Share unless (i) the number of Variable
Voting Shares outstanding (including the Preferred Shares, on an as converted
basis), as a percentage of the total number of votes attaching to Voting Shares
outstanding exceeds 25% or (ii) the total number of votes cast by or on behalf
of holders of Variable Voting Shares (including the Preferred Shares, on an as
converted basis) at any meeting exceeds 25% of the total number of votes that
may be cast at such meeting. If either of the above noted thresholds would
otherwise be surpassed at any time, the vote attached to each Variable Voting
Share will decrease proportionately such that (i) the Variable Voting Shares as
a class (including the Preferred Shares on an as converted basis) do not carry
more than 25% of the aggregate votes attached to all issued and outstanding
voting shares of ACE and (ii) the total number of votes cast by or on behalf of
holders of Variable Voting Shares (including the Preferred Shares on an as
converted basis) at any meeting do not exceed 25 % of the votes that may be cast
at such meeting.

Dividends

         Subject to the rights, privileges, restrictions and conditions
attaching to the shares of ACE of any other class ranking senior to the Variable
Voting Shares, the holders of the Variable Voting Shares shall, at the
discretion of the directors, be entitled to receive, out of monies, assets or
property of ACE properly applicable to the payment of dividends, any dividends
declared and payable by ACE on the Variable Voting Shares and the Variable
Voting Shares shall rank equally as to dividends on a share for share basis with
the Voting Shares and the Preferred Shares participating on an as converted
basis. All dividends declared in any fiscal year of ACE shall be declared in
equal or equivalent amounts per share on all Variable Voting Shares, Voting
Shares and the Preferred Shares participating on an as converted basis at the
time outstanding, without preference or distinction.

Subdivision or Consolidation

         No subdivision or consolidation of the Variable Voting Shares or the
Voting Shares shall occur unless, simultaneously, the shares of the other class
are subdivided or consolidated in the same manner, so as to maintain and
preserve the relative rights of the holders of the shares of each of the said
classes.

<PAGE>

                                    - 45 -

Rights upon Liquidation, Dissolution or Winding Up

         Subject to the rights, privileges, restrictions and conditions
attaching to the shares of ACE ranking prior to the Variable Voting Shares,
including the Preferred Shares, upon liquidation, dissolution or winding up of
ACE or other distribution of ACE's assets among its shareholders for the purpose
of winding up its affairs, the holders of the Variable Voting Shares and Voting
Shares shall be entitled to receive the remaining property of ACE and shall be
entitled to share equally, share for share, in all distributions of such assets.

Conversion

         Each issued and outstanding Variable Voting Share shall be converted
into one Voting Share, automatically and without any further act of ACE or of
the holder, if (i) such Variable Voting Share becomes held, beneficially owned
and controlled, directly or indirectly, otherwise than by way of security only,
by a Canadian; or (ii) the provisions contained in the Canada Transportation Act
relating to foreign ownership restrictions are repealed and not replaced with
other similar provisions.

         In the event that an offer is made to purchase Voting Shares and the
offer is one which must, pursuant to applicable securities legislation or the
rules of a stock exchange on which the Voting Shares are then listed, be made to
all or substantially all the holders of the Voting Shares in a province of
Canada to which the requirement applies, each Variable Voting Share shall become
convertible at the option of the holder into one Voting Share that shall be
subject to the offer at any time while the offer is in effect and until one day
after the time prescribed by applicable securities legislation for the offeror
to take up and pay for such shares as are to be acquired pursuant to the offer.
The conversion right may only be exercised in respect of Variable Voting Shares
for the purpose of depositing the resulting Voting Shares in response to the
offer and the transfer agent shall deposit the resulting Voting Shares on behalf
of the shareholder.

         If the Voting Shares resulting from the conversion and deposited
pursuant to the offer are withdrawn by the shareholder or are not taken up by
the offeror or the offer is abandoned or withdrawn, the Voting Shares resulting
from the conversion shall be reconverted automatically and without further act
from ACE or the holder, into Variable Voting Shares.

         There shall be no right to convert the Variable Voting Shares into
Voting Shares or to convert Voting Shares into Variable Voting Shares, except in
accordance with the conversion procedure set forth in the ACE Articles of
Arrangement.

Constraints on Ownership of Shares

         The Variable Voting Shares may only be held, beneficially owned or
controlled, directly or indirectly, by persons who are not Canadians.


Voting Shares

Voting

         The holders of the Voting Shares shall be entitled to receive notice
of, and to attend and vote at, all meetings of the shareholders of ACE (except
where the holders of a specified class are entitled to vote separately as a
class as provided in the CBCA) and each Voting Share shall confer the right to
one vote in person or by proxy at all meetings of shareholders of ACE.

Dividends

         Subject to the rights, privileges, restrictions and conditions
attaching to the shares of ACE of any other class ranking senior to the Voting
Shares, the holders of the Voting Shares shall, at the discretion of the
directors, be entitled to receive, out of monies, assets or property of ACE
properly applicable to the payment of dividends, any dividends declared and
payable by ACE on the Voting Shares and the Voting Shares shall rank equally as
to


<PAGE>

                                    - 46 -


dividends on a share for share basis with the Variable Voting Shares and the
Preferred Shares participating on an as converted basis and all dividends
declared in any fiscal year of ACE shall be declared in equal or equivalent
amounts per share on all Voting Shares, Variable Voting Shares and the Preferred
Shares on an as converted basis at the time outstanding, without preference or
distinction.

Subdivision or Consolidation

         No subdivision or consolidation of the Voting Shares or the Variable
Voting Shares shall occur unless, simultaneously, the shares of the other class
are subdivided or consolidated in the same manner, so as to maintain and
preserve the relative rights of the holders of the shares of each of the said
classes.

Rights upon Liquidation, Dissolution or Winding Up

         Subject to the rights, privileges, restrictions and conditions
attaching to the shares of ACE ranking senior to the Voting Shares, including
the Preferred Shares, upon liquidation, dissolution or winding up of ACE or
other distribution of ACE's assets among its shareholders for the purpose of
winding up its affairs, the holders of the Voting Shares and Variable Voting
Shares shall be entitled to receive the remaining property of ACE and shall be
entitled to share equally, share for share, in all distributions of such assets.

Conversion

         Unless the foreign ownership restrictions of the Canada Transportation
Act are repealed and not replaced with other similar restrictions, an issued and
outstanding Voting Share shall be converted into one Variable Voting Share,
automatically and without any further act of ACE or the holder, if such Voting
Share becomes held, beneficially owned or controlled, directly or indirectly,
otherwise than by way of security only, by a person who is not a Canadian.

Constraints on Ownership of Shares

         The Voting Shares may only be held, beneficially owned and controlled,
directly or indirectly, by Canadians.


Preferred Shares

Voting

         The holders of Preferred Shares will be entitled to vote on an as
converted basis with the Variable Voting Shares and the Voting Shares and to the
extent that they are held by persons who are not Canadians they shall be subject
to the same proportionate reduction in voting percentage as if, for voting
purposes only, the Preferred Shares had been converted into Variable Voting
Shares.

Participation

         The holders of Preferred Shares shall participate on an as converted
basis with the Variable Voting Shares and the Voting Shares with respect to all
dividends, distributions, spin off, split-off, subscription rights or other
offers or rights made available to holders of Variable Voting Shares and the
Voting Shares and any other similar transactions.

Liquidation Preference

         In the event of any liquidation, dissolution or winding up of ACE (with
each holder of the Preferred Shares being entitled to treat the occurrence of a
merger, amalgamation, sale of all or substantially all of the assets of ACE or
other similar transaction involving a change in control of ACE as a liquidation
for these purposes), then the holders of the Preferred Shares shall be entitled
to receive, prior to and in preference to the holders of Variable Voting Shares
and the Voting Shares, an amount per Preferred Share equal to the Fully Accreted
Value of such

<PAGE>

                                    - 47 -


Preferred Shares, determined as of the date of such event. For the
purposes of the terms of the Preferred Shares, "Fully Accreted Value" means,
with respect to each Preferred Share issued on September 30, 2004 to the
Cerberus Affiliate, as of any date, the initial purchase price of such Preferred
Share, increased at a rate of 5% per annum, compounded semi annually from the
date of issuance of such Preferred Shares.

Optional Conversion

         The Preferred Shares shall be convertible at the option of the holders
thereof at any time into Variable Voting Shares, if held by a non Canadian, or
into Voting Shares, if held by a Canadian, at a conversion rate equal to the
Fully Accreted Value per Preferred Share (as of the conversion date) divided by
the Conversion Price. For the purposes of the terms of the Preferred Shares,
"Conversion Price" is initially equal to 135% of the initial per share value
attributed to the Variable Voting Shares and Voting Shares on September 30,
2004, being $20.00. The Conversion Price was adjusted automatically downward on
the first anniversary of the date of issuance of the Preferred Shares to 130% of
the subscription price, subject to (i) adjustment as described in "Mandatory
Redemption/Conversion" below and (ii) customary public company anti-dilution
protection for stock splits, stock dividends, subdivisions, combinations and
similar transactions. There shall be no special adjustment for below market or
below Conversion Price issuances.

Mandatory Redemption/Conversion

         The holders of Preferred Shares shall be required to convert the
Preferred Shares into Variable Voting Shares (if the Preferred Shares are not
owned and controlled by a Canadian) or Voting Shares (if the Preferred Shares
are owned and controlled by a Canadian), within 10 days after the seventh
anniversary of the date of issuance of the Preferred Shares (the "Initial
Mandatory Conversion Date") provided, however, that if the closing price of
Variable Voting Shares or Voting Shares, as the case may be, does not exceed the
Fully Accreted Value of a Preferred Share on at least 30 of the 100 trading days
immediately prior to the Initial Mandatory Conversion Date then the holders
thereof shall not be required to convert their Preferred Shares into Variable
Voting Shares or Voting Shares, as the case may be, and on the Initial Mandatory
Conversion Date the then applicable Conversion Price shall automatically be
reduced by 3.75%.

         In the event the Preferred Shares have not been converted on or prior
to the Initial Mandatory Conversion Date, on each six month anniversary of the
Initial Mandatory Conversion Date (each a "Subsequent Mandatory Conversion
Date") until and including the 10 year anniversary of the date of issuance of
the Preferred Shares (the "Final Maturity Date"), the Preferred Shares shall be
subject to mandatory conversion within 10 days of any Subsequent Mandatory
Conversion Date if, and only if, the closing price of Variable Voting Shares or
Voting Shares, as the case may be, exceeds the Fully Accreted Value of a
Preferred Share on at least 30 of the 100 trading days immediately prior to such
Subsequent Mandatory Conversion Date and, if such threshold is not met, the then
applicable Conversion Price shall automatically be reduced by an additional
3.75% on each such Subsequent Mandatory Conversion Date. If the foregoing test
is not met with respect to the Subsequent Mandatory Conversion Date that is the
Final Maturity Date, the holders of Preferred Shares shall have the right to
require ACE to redeem each of the Preferred Shares in cash on the Final Maturity
Date at a per share redemption price equal to the Fully Accreted Value (as at
the Final Maturity Date).

         Notwithstanding the foregoing, the Preferred Shares shall not be
subject to mandatory conversion as described above unless the Variable Voting
Shares and Voting Shares are then listed and posted on the Toronto Stock
Exchange, and a registration statement, prospectus or similar offering document
permitting the distribution and sale of such Variable Voting Shares and Voting
Shares throughout Canada and/or the United States of America is then effective
covering all of the Variable Voting Shares and Voting Shares into which the
Preferred Shares are convertible at the time of such mandatory conversion.

Mandatory Conversion

         If at any time during (i) the period commencing on the date of
issuance of the Preferred Shares and ending on and including the first
anniversary thereof the closing price of the Variable Voting Shares or Voting
Shares, as the case may be, for each of 30 consecutive trading days exceeds
200% of the then applicable Conversion Price or (ii) any period after the
first anniversary of the date of issuance of the Preferred Shares the closing
price of the

<PAGE>

                                    - 48 -


Variable Voting Shares or Voting Shares, as the case may be, for each
of 30 consecutive trading days exceeds 175% of the then applicable Conversion
Price, and, in each case, if the Variable Voting Shares or Voting Shares are
then listed and posted on the Toronto Stock Exchange and a registration
statement, prospectus or other similar offering document permitting the
distribution and sale of such Variable Voting Shares and Voting Shares
throughout Canada and/or the United States of America is then effective
covering all of the Variable Voting Shares and Voting Shares into which the
Preferred Shares are convertible, then ACE may require the holders of Preferred
Shares to convert the Preferred Shares into Variable Voting Shares, if the
Preferred Shares are not owned by a Canadian, or Voting Shares, if the
Preferred Shares are owned by a Canadian.

Organic Change

         With respect to any recapitalization, reorganization, reclassification,
consolidation, amalgamation, arrangement, merger, sale of all or substantially
all of ACE's assets to another person or other transaction which is effected in
such a way that holders of Variable Voting Shares and Voting Shares are entitled
to receive (either directly or upon subsequent liquidation) stock, securities or
assets with respect to or in exchange for Variable Voting Shares or Voting
Shares, as the case may be (each an "Organic Change") which includes a sale of
all or substantially all of ACE's assets or where ACE is not the surviving
entity, the holders of the Preferred Shares shall be entitled to cause ACE to
either (i) require that the surviving entity or its publicly traded parent issue
to the holders of Preferred Shares in exchange for such shares, a security of
the surviving or publicly traded parent entity evidenced by a written instrument
substantially similar in form and substance to the Preferred Shares, including,
without limitation, having the same economic rights and preferences as the
Preferred Shares and having a rank senior to all capital stock of such issuing
entity or (ii) make appropriate adjustments contemporaneously to the rights
attached to the Preferred Shares so as to preserve in all respects the benefits
conferred on the holders of the Preferred Shares by the terms of the Preferred
Shares.

         With respect to any reorganization, amalgamation, arrangement, merger
or other similar transaction that does not constitute an Organic Change,
appropriate adjustments shall contemporaneously be made to the rights
(including, without limitation, the conversion right) attached to the Preferred
Shares so as to preserve in all respects the benefits conferred on the holders
of the Preferred Shares by the terms of the Preferred Shares.

Pre-emptive Rights

         If ACE proposes to issue or sell any Variable Voting Shares or Voting
Shares or other equity securities, rights, options, warrants or other
convertible securities which represent rights to purchase Variable Voting Shares
or Voting Shares, as the case may be, each holder of Preferred Shares shall be
entitled to purchase a number of such Variable Voting Shares or Voting Shares,
as the case may be, or other equity securities, rights, options, warrants or
other convertible securities sufficient to allow such holder to maintain its
proportionate equity ownership in ACE, on a fully diluted basis at the level of
such interest immediately prior to such issuance or sale, subject to exceptions
for issuances under management and employee stock incentive plans approved by
the board of directors of ACE.

Notes

4.25% Convertible Senior Notes

         ACE has an amount of $330 million long-term debt securities (the
"Notes") issued and outstanding. The Notes are senior unsecured obligations of
ACE and rank equally in right of payment to all other senior unsecured
indebtedness of ACE and senior in right of payment to any subordinated
indebtedness of ACE. The Notes are subordinated to all existing and future
secured indebtedness of ACE. In addition, the Notes are effectively subordinated
to all existing and future indebtedness and other liabilities and commitments of
the subsidiaries of ACE.

         Each Note is convertible at the option of the holder into Voting Shares
(if the Notes are owned and controlled by a Canadian) or into Variable Voting
Shares (if the Notes are not owned and controlled by a Canadian) at an initial
conversion price of C$48.00 per Share, being an initial ratio of approximately
20.8333 Shares per $1,000 principal amount of Notes, subject to adjustment in
certain events in accordance with the indenture

<PAGE>

                                    - 49 -


governing the Notes. On March 22, 2006, ACE announced that, following
the special distribution of 0.18 units of Aeroplan Income Fund per Variable
Voting Share, Voting Share and Preferred Share, the conversion ratio in effect
immediately prior to the opening of business on March 22, 2006 is 22.2838
Shares for each $1,000 principal amount of Notes. Holders converting their
Notes will not receive any payment upon conversion representing accrued but
unpaid interest on such Notes. Subject to the satisfaction of certain
conditions, ACE may, in lieu of delivering Voting Shares or Variable Voting
Shares upon conversion of all or a portion of the Notes, elect to pay cash or a
combination of cash and Voting Shares or Variable Voting Shares.

Ratings

         Ratings generally address the ability of a company to repay principal
and interest or dividends on securities. The Notes are rated by Dominion Bond
Rating Service Limited ("DBRS").

         This section describes the credit ratings that ACE has received for its
Notes. These ratings provide investors with an independent measure of credit
quality of an issue of securities. Each rating should be evaluated
independently.

         These ratings are not recommendations to purchase, hold or sell the
Notes, or a comment on the market price or suitability for a particular
investor. There is no assurance that any rating will remain in effect for any
given period of time or that any rating will not be revised or withdrawn in the
future by a rating agency.

         The table below shows the range of credit ratings that DBRS assigns to
long-term debt instruments.

  Agency          Highest Quality of Securities     Lowest Quality of Securities
                            Rated                              Rated
--------------------------------------------------------------------------------
   DBRS                      AAA                                 D
--------------------------------------------------------------------------------


         The DBRS long-term debt rating scale indicates the risk that a company
may not meet its obligations to pay interest and principal in a timely manner.
Every DBRS rating is based on quantitative and qualitative considerations
relevant to the borrowing entity.

         ACE has received the following credit rating for the Notes it has
issued.

            Agency                              Long-Term Debt Credit Rating
--------------------------------------------------------------------------------
             DBRS                                         B (high)
--------------------------------------------------------------------------------


         The DBRS B (high) rating on long-term debt ranks 14th among the 26
long-term debt credit ratings given by DBRS. According to DBRS, a company with a
long-term debt rated B is considered highly speculative and there is a
reasonably high level of uncertainty as to the ability of the entity to pay
interest and principal on a continuing basis in the future, especially in
periods of economic recession or industry adversity.

                               ESCROWED SECURITIES

         As of December 31, 2005, the Monitor appointed by the Court in
connection with the restructuring of Air Canada and certain of its subsidiaries
held 27,927 Variable Voting Shares in escrow, which amounted to 0.04% of the
total outstanding Variable Voting Shares as at December 31, 2005. These
Variable Voting Shares were released from escrow and distributed in accordance
with the terms of the Plan. As of the date hereof, the Monitor appointed by the
Court in connection with the restructuring of Air Canada and certain of its
subsidiaries does not hold any Variable Voting Shares or Voting Shares in
escrow.

<PAGE>
                                    - 50 -


                             DIRECTORS AND OFFICERS


Directors

         The name, municipality of residence and principal occupation of each of
the directors are, as of the date hereof, as set forth below. Such individuals
have served as directors of ACE since the dates and hold the number of shares of
ACE set forth opposite their respective names.

<TABLE>
<CAPTION>

 Name and Municipality            Principal Occupation                         Director Since          Shares Held
 of Residence
 -----------------------------    ------------------------------------------   ------------------      --------------

 <S>                              <C>                                          <C>                        <C>
 Bernard Attali(4)(6)             Country Advisor /                            September 30, 2004         5,000(2)
 Paris, France                    Texas Pacific Group France

 Robert E. Brown(4)(5)            President and Chief Executive Officer        September 30, 2004         10,000(1)
 Montreal, Quebec                 CAE Inc.

 Carlton D. Donaway(4)(6)         Senior Advisor - Operations                  December 15, 2004             Nil
 Redmond, Washington              Cerberus Capital Management, L.P.

 Michael M. Green(4)(6)           Managing Director and President-Operations   September 30, 2004            Nil
 Radnor, Pennsylvania             Cerberus Capital Management, L.P.

 W. Brett Ingersoll(3)(5)         Managing Director                            September 30, 2004            Nil
 New York, New York               Cerberus Capital Management, L.P.

 Pierre Marc Johnson(4)(5)        Senior Counsel                               September 30, 2004         5,000(1)
 Montreal, Quebec                 Heenan Blaikie LLP

 Richard H. McCoy(4)(5)(6)        Corporate Director                           August 3, 2005             4,000(1)
 Toronto, Ontario

 John T. McLennan(3)(6)           Corporate Director                           September 30, 2004         10,000(1)
 Mahone Bay, Nova Scotia

 Robert A. Milton                 Chairman, President and Chief Executive      June 29, 2004              24,336(1)
 Westmount, Quebec                Officer, ACE

 David I. Richardson(3)(5)        Corporate Director                           September 30, 2004         10,000(1)
 Grafton, Ontario

 Marvin Yontef (4)                Senior Partner                               June 29, 2004              5,000(1)
 Toronto, Ontario                 Stikeman Elliott LLP
</TABLE>

________________

(1) Voting Shares.
(2) Variable Voting Shares.
(3) Member of the Audit, Finance and Risk Committee.
(4) Member of the Governance and Corporate Matters Committee.
(5) Member of the Human Resources and Compensation Committee.
(6) Member of the Nominating Committee.

         Unless otherwise indicated below, each of the directors has held the
occupation listed above for more than five years. Mr. Brown was Chairman of Air
Canada from 2003 to 2004 and President and Chief Executive Officer of Bombardier
from 1999 to 2002. Mr. Donaway was Executive Chairman of DHL Holdings USA from
2003 to 2004, Chairman, President and Chief Executive Officer of Airborne Inc.
from 2002 to 2003 and President and Chief Executive Officer of ABX Air Inc. from
1992 to 2003. Mr. Ingersoll was a Partner at J.P. Morgan Partners from 1994 to
2002. Mr. McLennan was Vice Chairman and Chief Executive Officer of AT&T Canada
(which was renamed Allstream Inc.) from 2000 to 2004. Mr. Richardson was
Chairman, Ernst & Young Inc. and Senior Partner, Ernst & Young LLP (Canada) from
1987 to 2002.
<PAGE>
                                    - 51 -



         The term of office of all of the above directors will expire at the
next annual meeting of shareholders of ACE or until their successors are
appointed or elected.


Officers

         The name, municipality of residence and position held with ACE of each
of the officers are as set forth below:

Name and Municipality of Residence             Position Held
----------------------------------             -------------
Robert A. Milton .................     Chairman, President and Chief Executive
Westmount, Quebec                      Officer, ACE, Chairman, Air Canada,
                                       Chairman, Aeroplan, and Chairman, Jazz

Brian Dunne ......................     Executive Vice President and Chief
Westmount, Quebec                      Financial Officer

Greg Cote ........................     Senior Vice President, Corporate Finance
Toronto, Ontario                       and Strategy

Duncan Dee .......................     Senior Vice President, Corporate Affairs
Ottawa, Ontario                        and Chief Administrative Officer

Sydney John Isaacs ...............     Senior Vice President, Corporate
Westmount, Quebec                      Development and Chief Legal Officer

Jack McLean ......................     Controller
Winnipeg, Manitoba

Carolyn M. Hadrovic...............     Corporate Secretary
Beaconsfield, Quebec

         Unless otherwise indicated below, each of the officers has held a
position with Air Canada similar to that listed above for more than five years.
Brian Dunne was a partner at Arthur Andersen prior to taking up the position of
Chief Financial Officer of Aer Lingus in October 2001. Mr. Dunne joined ACE in
September 2005. Greg Cote was a partner at Ernst & Young since 1997 prior to
joining ACE in September 2005. Duncan Dee was appointed Executive Assistant to
the President & Chief Executive Officer, Air Canada in May 2000, Vice
President, Corporate Affairs, Air Canada in November 2002, Senior Vice
President, Corporate Affairs, Air Canada in April 2004 and Senior Vice
President, Corporate Affairs & Chief Administrative Officer, ACE in December
2004. Sydney John Isaacs joined Air Canada in 2000, initially in a business
development capacity, and subsequently became Senior Director, Mergers &
Acquisitions, and then Senior Director, Restructuring before being appointed
Senior Vice President, Corporate Development and Chief Legal Officer of ACE in
November 2004. Jack McLean was General Manager, Finance, Air Canada since 1999
before being appointed Controller of ACE in November 2004. Carolyn Hadrovic was
Deputy Secretary of ACE before being appointed Corporate Secretary in December
2005 and previously, Senior Counsel, Regulatory and International Law, with Air
Canada.

         The name, municipality of residence and position held with Air Canada,
Aeroplan, Jazz, ACTS LP and other subsidiaries of ACE of each of the following
officers are set forth below:

Name and Municipality of Residence         Position Held with Air Canada
----------------------------------         -----------------------------

Montie R. Brewer...................        President and Chief Executive
Hudson, Quebec                             Officer, Air Canada

Joshua Koshy......................         Executive Vice President and
Richmond Hill, Ontario                     Chief Financial Officer, Air Canada

Rob Reid..........................         Executive Vice President and
Oakville, Ontario                          Chief Operating Officer, Air Canada


<PAGE>
                                    - 52 -


Sean Menke........................         Executive Vice President and Chief
Baie d'Urfe, Quebec                        Commercial Officer, Air Canada

Lise Fournel .....................         Chief Information Officer, Air
Lachine, Quebec                            Canada and President and Chief
                                           Executive Officer, Destina.ca

Name and Municipality of Residence         Position Held with Aeroplan
----------------------------------         ---------------------------

Rupert J. Duchesne................         President and Chief Executive
Montreal, Quebec                           Officer, Aeroplan

Rob Peterson......................         Executive Vice President, Finance
Beaconsfield, Quebec                       and Chief Financial Officer,
                                           Aeroplan

Name and Municipality of Residence         Position Held with Jazz
----------------------------------         -----------------------

Joseph D. Randell.................         President and Chief Executive
Waverly, Nova Scotia                       Officer, Jazz

Allan Rowe........................         Senior Vice President and Chief
Halifax, Nova Scotia                       Financial Officer, Jazz

Name and Municipality of Residence         Position Held with ACTS LP
----------------------------------         --------------------------
Chahram Bolouri...................         President and Chief Executive
Beaconsfield, Quebec                       Officer, ACTS LP

Pat Iaconi........................         Vice President and Chief Financial
Montreal, Quebec                           Officer, ACTS LP

Name and Municipality of Residence         Position Held with other Subsidiaries
----------------------------------         -------------------------------------
Claude Morin......................         President and Chief Executive
Montreal, Quebec                           Officer, AC Cargo LP

Chantal Baril ....................         President and Chief Executive
Pointe-Claire, Quebec                      Officer, ACGHS LP

Benjamin M. Smith.................         Acting President and Chief Executive
Toronto, Ontario                           Officer, Air Canada Vacations Vice
                                           President, Planning, Air Canada

         As at March 21, 2006, the directors and officers mentioned above as a
group owned, directly or indirectly, or had control or direction over 71,593
Voting Shares representing approximately 0.29% of the outstanding Voting Shares
and 5,000 Variable Voting Shares representing approximately 0.006% of the
outstanding Variable Voting Shares. As at March 21, 2006, the directors and
officers mentioned above as a group owned, directly or indirectly, or had
control or direction over 85,700 units of Aeroplan Income Fund representing
approximately 0.18% of the outstanding units of Aeroplan Income Fund. As at
March 21, 2006, the directors and officers mentioned above as a group owned,
directly or indirectly, or had control or direction over 101,000 units of Jazz
Air Income Fund representing approximately 0.4% of the outstanding units of Jazz
Air Income Fund.

Corporate Cease Trade Orders or Bankruptcies

         To the knowledge of ACE, in the last ten years, no director or
executive officer of ACE is or has been a director or executive officer of any
company that, while that person was acting in that capacity, (a) was the subject
of a cease trade order or similar order, or an order that denied the relevant
company access to any exemptions under securities legislation, for a period of
more than 30 consecutive days, (b) was the subject of an event that resulted,
after that person ceased to be a director or executive officer, in the company
being the subject of a cease trade order or similar order or an order that
denied the relevant company access to an exemption under securities legislation,
for a period of more than 30 consecutive days or (c) or within a year of that
person ceasing to act in that capacity, became bankrupt, made a proposal under
any legislation relating to bankruptcy or insolvency or was subject to or


<PAGE>
                                    - 53 -


instituted any proceedings, arrangement or compromise with creditors or had a
receiver, receiver manager or trustee appointed to hold its assets except for
the following:

         (i)    Following the acquisition of Canadian Airlines International
                Ltd. ("CAIL") by Air Canada in 2000, Robert A. Milton became a
                director of CAIL. Thereafter, CAIL restructured under the CCAA
                pursuant to a plan of compromise which became effective on July
                5, 2000. CAIL's common shares and non-voting shares were
                suspended from trading by the Toronto Stock Exchange on June
                27, 2000 and delisted on July 6, 2000. Robert A. Milton was
                President and Chief Executive Officer and a director of Air
                Canada when it filed for protection under the CCAA on April 1,
                2003;

         (ii)   Pierre Marc Johnson was a director of Air Canada when it
                filed for protection under the CCAA on April 1, 2003;

         (iii)  Robert E. Brown was a director of Air Canada when it filed
                for protection under the CCAA on April 1, 2003. Mr. Brown was
                a director of Nortel Networks Corporation when, on or about
                May 31, 2004, cease trade orders were issued against
                directors, officers and certain other current and former
                employee of Nortel Networks Corporation and Nortel Networks
                Limited (collectively, "Nortel Networks"). The management
                cease trade orders were imposed in response to the failure by
                Nortel Networks to file certain financial statements with the
                Canadian securities regulators;

         (iv)   John T. McLennan was the Chief Executive Officer of AT&T
                Canada when it filed for protection under the CCAA on October
                15, 2002;

         (v)    Rupert S. Duchesne was President and Chief Executive
                Officer, Aeroplan when Air Canada filed for protection under
                the CCAA on April 1, 2003;

         (vi)   Michael M. Green was a director of Anchor Glass Container
                Corporation when it filed a voluntary petition for
                reorganization under Chapter 11 of the US Bankruptcy Code in
                August 2005; and

         (vii)  Montie R. Brewer was Senior Vice President, Planning for United
                Airlines until March 31, 2002. UAL Corp., the parent company of
                United Airlines, filed for protection under Chapter 11 of the
                US Bankruptcy Code on December 9, 2002.


Penalties or Sanctions

         To the knowledge of ACE, no director or executive officer of ACE, (i)
has been subject to any penalties or sanctions imposed by a court relating to
securities legislation or by a securities regulatory authority or has entered
into a settlement agreement with a securities regulatory authority or (ii) has
been subject to any other penalties or sanctions imposed by a court or
regulatory body that would likely be considered important to a reasonable
investor in making an investment decision.


Personal Bankruptcies

         To the knowledge of ACE, in the last ten years, no director or
executive officer has become bankrupt, made a proposal under any legislation
relating to bankruptcy or insolvency, or was subject to or instituted any
proceedings, arrangement or compromise with creditors, or had a receiver,
receiver manager or trustee appointed to hold the assets of the director or
executive officer.

                                 AUDIT COMMITTEE

Audit Committee Charter

         The charter of the Audit, Finance and Risk Committee ("Audit
Committee") is attached as Appendix A to this Annual Information Form.

Composition of Audit Committee

         The Audit Committee of ACE consists of David I. Richardson (chairman),
W. Brett Ingersoll and John T. McLennan. Each member of the Audit Committee is
independent and financially literate as defined under Multilateral Instrument
52-110 - Audit Committees.



<PAGE>
                                    - 54 -


Relevant Education and Experience of Audit Committee Members

         In addition to each member's general business experience, the education
and experience of each Audit Committee member that is relevant to the
performance of his or her responsibilities as an Audit Committee member is as
follows:

         (i)    David I. Richardson is a corporate director. Mr. Richardson
                is a director and Chairman of the audit committee of Husky
                Injection Molding Systems Ltd. Mr. Richardson is also a
                director of Air Canada, Jazz Air Holding GP Inc. and a
                trustee of Aeroplan Income Fund. Mr. Richardson is the former
                Chairman of Ernst & Young Inc. (Canada) and a former
                Executive Partner of Ernst & Young LLP. Mr. Richardson joined
                its predecessor Clarkson, Gordon & Co. in 1963 and was
                appointed President of The Clarkson Company Limited in 1982.
                Mr. Richardson was also a member of the Management and
                Executive Committees of Ernst & Young LLP, national managing
                partner of the firm's Corporate Finance practice and the
                senior partner in the Corporate Recovery and Restructuring
                practice until retirement from the partnership in 2002. Mr.
                Richardson holds a Bachelor of Commerce Degree from the
                University of Toronto, is a member and a Fellow of the
                Institute of Chartered Accountants of Ontario.

         (ii)   W. Brett Ingersoll is the Managing Director of Cerberus Capital
                Management, L.P. (private equity investment firm), a senior
                member of its Private Equity Practice and a member of its
                Investment Committee. Mr. Ingersoll is also a director of
                Aeroplan Holding GP Inc. Prior to joining Cerberus in 2002, Mr.
                Ingersoll was a Partner at JP Morgan Partners (formerly Chase
                Capital Partners) from 1993 to 2002 (private equity investment
                firm). Mr. Ingersoll is a director of various public and private
                companies including Coram Health Care, IAP Worldwide Services,
                Inc., AerCap B.V., Talecris Bio Therapeutics Inc. and Endura
                Care, LLC. Mr. Ingersoll holds a BA in economics from Brigham
                Young University and a MBA from Harvard University.

         (iii)  John T. McLennan is a corporate director. Mr. McLennan is a
                director of Hummingbird Ltd., Amdocs Ltd., Emera, Manitoba
                Telephone Systems (Vice-Chairman) and Medisys Health Services.
                Mr. McLennan is a director of Jazz Air Holding GP Inc. and also
                a trustee of Aeroplan Income Fund Mr. McLennan was recently
                Vice-Chairman and Chief Executive Officer of Allstream. Prior to
                that position, he served as AT&T Canada's Vice Chairman and
                Chief Executive Officer. He was also the founding President of
                Jenmark Consulting Inc., President and Chief Executive Officer
                of Bell Canada, President of Bell Ontario as well as Chairman,
                President and Chief Executive Officer of BCE Mobile
                Communications Inc. Mr. McLennan has served as President and
                Chief Executive Officer of Cantel Wireless and Executive Vice
                President of Mitel Communications Inc. Mr. McLennan holds a BSc
                and a MSc in Industrial Management from Clarkson University.

Pre-approval Policies and Procedures

         The Audit Committee reviews and approves the nature of all non-audit
services, as permitted by securities legislation and regulations, to be provided
by the Corporations' external auditor prior to the commencement of such work. In
this regard, the Audit Committee will prepare a report for presentation to the
shareholders of the Corporation quarterly or annually, as required, regarding
the Audit Committee's approval of such non-audit services in the period.

         The Audit Committee will also require and review a report from the
external auditor of all relationships between the external auditor and its
related entities and the Corporation and its related entities, including all
work performed and fees paid for such work of a non-audit nature, that in the
external auditor's professional judgment may reasonably be perceived to bear on
its objectivity and independence and confirming that in the external auditor's
professional judgment it is independent of the Corporation and discuss this
report with the external auditor in order to evaluate the objectivity and
independence of the external auditor. The Audit Committee will also review steps
taken by the external auditor to address any findings in any of the foregoing
reviews.


<PAGE>
                                    - 55 -


Auditors' Fees

         PricewaterhouseCoopers LLP has served as the Corporation's auditing
firm since April 26, 1990. Fees payable for the years ended December 31, 2005
and December 31, 2004 to PricewaterhouseCoopers LLP and its affiliates are
$4,425,064 and $4,137,228, respectively. Fees payable to PricewaterhouseCoopers
LLP and its affiliates in 2005 and 2004 are detailed below.

                             Year ended December 31,    Year ended December 31,
                                      2005                      2004

Audit fees                           $4,161,299                $3,356,851

Audit-related fees                     $242,015                  $321,269

Tax fees                                $21,750                  $459,108

All other fees                              Nil                       Nil
                             -----------------------    -----------------------
                                      $4,425,064                $4,137,228

         The nature of each category of fees is described below.

Audit fees

         Audit fees were paid for professional services rendered for the audit
of the Corporation's annual financial statements and for services that are
normally provided in connection with statutory and regulatory filings or
engagements.

Audit-related fees

         Audit-related fees were paid for professional services related to
pension plan audits, specified procedures reports and other items related to the
audit.

Tax fees

         Tax fees were paid for professional services rendered with respect to
commodity and income taxes.


                        INTEREST OF MANAGEMENT AND OTHERS
                            IN MATERIAL TRANSACTIONS

         On September 30, 2004, as part of Air Canada's restructuring process,
the Cerberus Affiliate invested $250 million in ACE in consideration for the
issuance of 12,500,000 Preferred Shares of ACE. The Cerberus Affiliate is an
affiliate of Cerberus Capital Management, L.P. Michael M. Green, Carlton D.
Donaway and W. Brett Ingersoll, all directors of ACE, are respectively
President-Operations, Senior Advisor-Operations and Managing Director of
Cerberus Capital Management, L.P.


                          TRANSFER AGENT AND REGISTRAR

         The Transfer Agent and registrar for the Variable Voting Shares and
Voting Shares of ACE is CIBC Mellon Trust Company at its principal transfer
offices in Montreal, Toronto, Vancouver, Calgary and Halifax.


<PAGE>
                                    - 56 -


                                LEGAL PROCEEDINGS

         A description of certain legal proceedings to which ACE is a party
appears under the heading "Contingencies, Guarantees and Indemnities" in Note 18
to the consolidated audited annual financial statements of ACE for the year
ended December 31, 2005. ACE's audited annual financial statements for the year
ended December 31, 2005 are available on SEDAR at www.sedar.com.


                               MATERIAL CONTRACTS

         The contracts that are material to the Corporation and that were
entered into within the year ended December 31, 2005 or before such year but
which are still in effect are the following:

         (i)    Standby Purchase Agreement between Deutsche Bank Securities
                Inc. and Air Canada dated as of October 29, 2003, as amended
                and restated by the amended and restated standby purchase
                agreement, dated as of April 29, 2004;

         (ii)   Investment Agreement between Cerberus ACE Investment, LLC and
                Air Canada dated June 23, 2004; and

         (iii)  The Aircraft General Terms Agreement AGTA-ACN and related
                agreements between The Boeing Company and Air Canada, a
                wholly-owned subsidiary of ACE, dated November 4, 2005.

         Please refer to the section titled "Three-year Summary: Evolution of
Business" for the particulars of such contracts.


                                     EXPERTS

         The Corporation's auditors are PricewaterhouseCoopers LLP, Chartered
Accountants, who have prepared an independent auditor's report dated February 9,
2006 in respect of the consolidated statements of financial position of the
Corporation as at December 31, 2005 and 2004 and the consolidated statements of
operations and retained earnings and cash flows for the year ended December 31,
2005 and for the period from June 29, 2004 to December 31, 2004.
PricewaterhouseCoopers LLP has advised that they are independent with respect to
the Corporation within the meaning of the Rules of Professional Conduct of the
Ordre des comptables agrees du Quebec.


                             ADDITIONAL INFORMATION

         Additional information, including directors' and officers' remuneration
and indebtedness, principal holders of the ACE's securities and securities
authorized for issuance under equity compensation plans will be contained in
ACE's management proxy circular for its 2006 annual meeting of shareholders.
Additional financial information is provided in ACE's financial statements and
management's discussion and analysis for the year ended December 31, 2005. The
above information and additional information relating to ACE are available on
SEDAR at www.sedar.com.

         The following documents can be obtained by sending your request to the
Corporate Secretary of ACE, at 5100 de Maisonneuve Boulevard West, Montreal,
Quebec, H4A 3T2 :

         (i)    this Annual Information Form, together with any document
                incorporated herein by reference;

         (ii)   the 2005 Management's Discussion & Analysis / 2005 Financial
                Statements and Notes of ACE and any interim financial
                statements filed after the audited financial statements for
                ACE's most recently completed financial year;

         (iii)  the Corporation's management proxy circular for the 2005
                annual and special shareholder meeting filed with the Securities
                Commissions on September 30, 2005; and


<PAGE>
                                    - 57 -


         (iv)   any other documents that are incorporated by reference into a
                preliminary short form prospectus or a short form prospectus
                pursuant to which securities of ACE are in the course of a
                distribution.

         Except when securities of ACE are in the course of distribution
pursuant to a short form prospectus or a preliminary short form prospectus, ACE
may require the payment of a reasonable charge from persons, other than security
holders of ACE, requesting copies of these documents.
<PAGE>

                                   - 58 -



                                  APPENDIX A -
                    CHARTER AUDIT, FINANCE AND RISK COMMITTEE

                                (the "Committee")

                        OF THE BOARD OF DIRECTORS OF ACE

                               (the "Corporation")


1.       Structure, Procedure, Qualifications
         ------------------------------------

The Audit, Finance and Risk Committee (the "Audit Committee") of the Corporation
shall be composed of not less than three directors, all of whom shall meet the
independence, experience and other membership requirements under applicable
laws, rules and regulations as determined by the Board of Directors. The members
of the Audit Committee shall have no relationships with management, the
Corporation and its related entities that in the opinion of the Board may
interfere with their independence from management and from the Corporation. In
addition, an Audit Committee member shall not receive, other than for service on
the Board or the Audit Committee or other committees of the Board, any
consulting, advisory, or other compensatory fee from the Corporation or any of
its related parties or subsidiaries. The members of the Audit Committee shall
possess the mix of characteristics, experiences and skills to provide an
appropriate balance for the performance of the duties of the Audit Committee and
in particular each member of the Audit Committee shall be "financially literate"
and at least one member shall be a "financial expert" as defined by relevant
securities legislation or regulations.

A quorum of the Audit Committee shall be a majority of the members, and a
majority of the members present shall be required to pass a resolution of the
Audit Committee. The Audit Committee shall be responsible to the Board of
Directors of the Corporation. The Chairman and the members of the Audit
Committee shall be appointed annually by the Board.

2.       Objectives
         ----------

(a) The objectives of the Audit Committee are as follows:

         (i)      To assist the Board in the discharge of its responsibility to
                  monitor the component parts of the Corporation's financial
                  reporting and audit process.

         (ii)     To maintain and enhance the quality, credibility and
                  objectivity of the Corporation's financial reporting and to
                  satisfy itself and oversee management's responsibility as to
                  the adequacy of the supporting systems of internal financial
                  and accounting controls.

         (iii)    To assist the Board of Directors in its oversight of the
                  independence, qualifications and appointment of the external
                  auditor.

         (iv)     To monitor the performance of the internal financial and
                  accounting controls and of the internal and external auditors.

         (v)      To provide independent communication between the Board and the
                  internal auditor and the external auditor.

         (iv)     To facilitate in-depth and candid discussions between the
                  Audit Committee and management and the external auditor
                  regarding significant issues involving judgment and impacting
                  quality of controls and reporting.

3.       Duties
         ------

To achieve its objectives, the Audit Committee shall:

<PAGE>
                                     A-2


(a)      Monitor and review the quality and integrity of the Corporation's
         accounting and financial reporting process through discussions with
         management, the external auditor and the internal auditor. This will
         include a review of the annual and quarterly financial statements and
         Management's Discussion and Analyses ("MD&As") to be filed with
         regulatory authorities and provided to shareholders, and financial
         statements and other financial disclosure included in prospectuses,
         earnings press releases and other similar documents. The Audit
         Committee shall also review the Corporation's annual information form
         and other similar documents. These reviews will include:

         (i)    discussions with management and the external auditor and a
                consideration of the report by the external auditor to the
                Audit Committee of matters related to the conduct of an
                audit;

         (ii)   discussions with the external auditor respecting the
                auditor's judgment regarding both the acceptability and
                quality of the financial statements including the critical
                accounting policies and practices used by management in their
                preparation, alternative treatments and disclosures of
                financial information within generally accepted accounting
                principles that have been considered by management and their
                ramifications, the selection of changes in significant
                accounting policies, the method used to account for
                significant unusual transactions, the effect of significant
                accounting policies in controversial or emerging areas, the
                degree of aggressiveness or conservatism, as the case maybe,
                of the accounting policies adopted by the Corporation, the
                process used by management in formulating particularly
                significant accounting estimates and the basis for the
                external auditor's conclusions regarding the reasonableness
                of those estimates;

         (iii)  a review of significant adjustments arising from an audit;

         (iv)   a review of disagreements with management over the
                application of accounting policies as well as any disclosure
                in the financial statements;

         (v)    a review of all material off-balance sheet transactions and
                other relationships with non-consolidated entities that may
                have a material current or future effect on the financial
                condition of the Corporation including their disclosure or
                lack thereof in the applicable quarterly or annual financial
                statements;

         (vi)   a review of the external auditor's suggestions for
                improvements to the Corporation's operations and internal
                controls;

         (vii)  a review of the nature and size of unadjusted errors of a
                non-trivial amount;

         (viii) a review to ascertain that various covenants are complied
                with; and

         (ix)   the selection of, and changes in, accounting policies and
                consideration of the appropriateness of such selections and
                changes.

(b)      Determine, based on its review and discussion, whether to recommend the
         approval by the Board of such financial statements and the financial
         disclosure in any such annual information forms, earnings press
         releases, prospectuses and other similar documents.

(c)      Review with management, the internal auditor and the external auditor
         and, if considered appropriate, approve the release of the
         Corporation's quarterly financial statements and related MD&A.

(d)      Review with management, the external auditor and legal counsel, the
         Corporation's procedures to ensure compliance with applicable laws and
         regulations, and any significant litigation, claim or

<PAGE>
                                     A-3


         other contingency, including tax assessments, that would have a
         material effect upon the financial position or operating results of
         the Corporation and the disclosure or impact on the results of these
         matters in the quarterly and annual financial statements.

(e)      Meet with the Corporation's external auditor to review and approve
         their audit plan with particular emphasis on risk factors which could
         lead to a material misstatement of the financial statements, the scope
         and timing of the audit, the assumptions and decisions that have been
         made in developing the plan and co-ordination of work between the
         external auditor and the internal audit department.

(f)      Review and approve estimated audit and audit-related fees and expenses
         for the current year. Pre approve any significant additional audit and
         audit-related fees over the estimated amount. Review and approve audit
         and audit-related fees and expenses for the prior year. The authority
         for the determination and payment of fees to the external auditor rests
         solely and exclusively with the Audit Committee. The Corporation shall
         ensure that funding is available to the Audit Committee for payment of
         compensation to the external auditor.

(g)      Review

         (i)      and approve, or delegate to a member of the Audit Committee
                  the responsibility to review and approve and subsequently
                  report to the Audit Committee, the nature of all non-audit
                  services, as permitted by securities legislation and
                  regulations, to be provided by the Corporations' external
                  auditor prior to the commencement of such work. In this regard
                  the Audit Committee will prepare a report for presentation to
                  the shareholders of the Corporation quarterly or annually, as
                  required, regarding the Audit Committee's approval of such
                  non-audit services in the period;

         (ii)     and implement from time to time a process in connection with
                  non-audit services performed by the external auditor.

(h)      Review a report from the external auditor of all relationships between
         the external auditor and its related entities and the Corporation and
         its related entities, including all work performed and fees paid for
         such work of a non-audit nature, that in the external auditor's
         professional judgment may reasonably be perceived to bear on its
         objectivity and independence and confirming, or otherwise, that in the
         external auditor's professional judgment it is independent of the
         Corporation and discuss this report with the external auditor in order
         to evaluate the objectivity and independence of the external auditor.
         The Audit Committee should specifically require the external auditor
         to confirm that it is a registered public accounting firm as
         prescribed by various applicable securities regulations. As well, at
         least once a year the Audit Committee will carry out a review of the
         credentials of the members of the firm including without limitation
         the biographies of the members, whether there has been any enforcement
         actions, issues related to the firm and law suits, if any. A formal
         written report will be obtained from the external auditor outlining:
         the auditing firm's internal quality control procedures; any material
         issues raised within the preceding five years by the auditing firm's
         internal quality control review, peer reviews or any other inquiry or
         investigation by governmental or professional authority relating to
         any audit conducted by the firm. The Committee will also review steps
         taken by the auditing firm to address any findings in any of the
         forgoing reviews.

(i)      Receive reports on any consultations between management and other
         public accountants respecting accounting principles to be applied in
         preparing the quarterly or annual financial statements, and on any
         incidents involving fraud or illegal acts of which management, the
         internal audit department or the external auditor become aware. In
         this regard, review the relevant control procedures with management to
         ensure that such matters are adequately guarded against.

(j)      At least once each year:
<PAGE>
                                      A-4


         (i)     Meet privately with management to assess the performance of
                 the external auditor.

         (ii)    Meet privately with the external auditor, amongst other
                 things, to understand any restrictions placed on them or other
                 difficulties encountered in the course of the audit, including
                 instructions on the scope of their work and access to
                 requested information and the level of co-operation received
                 from management during the performance of their work and their
                 evaluation of the Corporation's financial, accounting and
                 audit personnel and systems.

(k)      Evaluate the performance of the external auditor, and if so determined,
         recommend that the Board either take steps to replace the external
         auditor or provide for the reappointment of the external auditor by the
         shareholders.

(l)      Regarding the services provided by the internal audit department, the
         Audit Committee will:

         (i)     meet privately with internal audit, amongst other things, to
                 understand any restrictions placed on them or other
                 difficulties encountered in the course of their audits,
                 including instructions on the scope of their work and access
                 to requested information and the level of co-operation
                 received from management during the performance of their work;

         (ii)    periodically review and approve the mandate, reporting
                 relationships and resources of the internal audit group;

         (iii)   review the objectivity, qualifications, adequacy and
                 experience of the internal audit staff and approve the
                 appointment, dismissal or replacement of the head of the
                 internal audit department;

         (iv)    review and approve annually the planned scope for the internal
                 audit program, its objectives, and the resources required to
                 attain these objectives;

         (v)     periodically throughout each year review the reports of the
                 internal audit department which describe the activities of the
                 internal audit department for the preceding period; and

         (vi)    review the working relationship between the internal audit
                 department and the external auditor, and between the internal
                 audit department and management.

(m)      Obtain from both the internal audit department and the Corporation's
         external auditor the major audit findings and internal control
         recommendations reported during the period under review, the response
         of management to those recommendations, and review the follow-up
         performed by management and the internal audit department in order to
         monitor whether management has implemented an effective system of
         internal accounting control.

(n)      Review significant emerging accounting and reporting issues, including
         recent professional and regulatory pronouncements, and assess their
         impact on the Corporation's financial statements.

(o)      Review policies and procedures for the receipt, retention and treatment
         of complaints received by the Corporation from employees, shareholders
         and other stakeholders regarding accounting issues and financial
         reporting, internal controls and internal or external auditing matters.
         The Audit Committee should be satisfied that sufficient controls are in
         place to ensure that all such complaints can be received anonymously
         and with an appropriate degree of confidentiality and that potential
         employee informants are aware of the process that is in place. The
         Audit Committee should also be satisfied that processes are in place to
         ensure that all such complaints, regardless of significance, are
         presented to the Audit Committee.
<PAGE>
                                      A-5


(p)      Review policies for approval of senior management expenses.

(q)      Review the process relative to the periodic certifications by the Chief
         Executive Officer and the Chief Financial Officer of the Corporation in
         respect of financial disclosures, the existence of any significant
         deficiencies in the design or operation of internal controls which
         could adversely affect the Corporation's ability to record, process,
         summarize and report financial data and any significant changes in
         internal controls or changes to the environment in which the internal
         controls operate, including corrections of material deficiencies and
         weaknesses.

(r)      Review with management the Corporation's computer systems, including
         procedures to keep the systems secure and contingency plans developed
         to deal with possible computer failures.

(s)      Review and approve all related party transactions as such term is
         defined from time to time in Policy Statement Q-27 of the Quebec
         Securities Commission and Rule 61-501 issued by the Ontario Securities
         Commission, as may be amended from time to time.

(t)      Review risk management systems and controls, especially in relation to
         derivatives, foreign currency exposure, hedging and insurance.

(u)      Whenever it may be appropriate to do so, retain and receive advice from
         experts, including independent legal counsel and independent public
         accountants, and conduct or authorize the conduct of investigations
         into any matters within the scope of the responsibility of the Audit
         Committee as the Audit Committee may consider appropriate. The
         Corporation shall ensure that funding is available to the Audit
         Committee in respect of the aforementioned activities.

(v)      Report regularly to the Board in writing on the activities, findings
         and conclusions of the Audit Committee.

(w)      Review this Charter on an annual basis and recommend to the Board any
         changes to it that the Audit Committee considers advisable.

(x)      Complete a self-assessment annually to determine how effectively the
         Audit Committee is meeting its responsibilities.

(y)      Perform such other functions as may be delegated from time to time by
         the Board.

(z)      Review the process for the rotation of the lead audit partner, the
         concurring partner and any other audit engagement team partner.

(aa)     Set policies for the hiring of employees or former employees of the
         Corporation's external auditors.

OTHER

(a)      Air Canada Pension Plans

         In relation to the Air Canada pension plans, the Audit Committee shall:

         (i)      On the recommendation of the Chief Financial Officer, approve
                  the investment structure for the plans, any applicable
                  Statement of Investment Policies and Objectives ("SIP&O"),
                  Statement of Investment Principles and Beliefs ("SIP&B") and
                  other investment policies for the plans;

         (ii)     With the assistance of the Chief Financial Officer,
                  periodically review for appropriateness of the pension funds
                  mission, funding policy, SIP&O, SIP&B, other


<PAGE>
                                      A-6


                  investment policies and investment structure, and monitor
                  overall pension funds operation, in particular plans funded
                  status, compliance of funding practices with funding policy,
                  compliance of investments with the SIP&O and as applicable,
                  the compliance of SIP&O with the investment principles and
                  beliefs as set out in the SIP&B;

         (iii)    With the assistance of the Chief Financial Officer,
                  periodically review and monitor the total and asset class
                  return for the defined benefit pension plans, and the
                  investment matters relating to the defined contribution plans;

         (iv)     Recommend to the Board for its approval the mission for the
                  pension funds, the funding policy, the level of annual
                  contributions, the appointment of the external auditor and the
                  custodians of the assets of the pension plans;

         (v)      Approve the actuary and consultant recommended by management;

         (vi)     On the recommendation of management, accept the actuarial
                  assumptions and actuarial valuation reports for the pension
                  plans; and

         (vii)    Approve the annual audited financial statements and the
                  pension accounting for the pension plans.

(b)      Public Disclosure

         (i)      Review and approve the Corporation's Public Disclosure Policy
                  and any changes related thereto and ensure consistency with
                  current developments and best practices;

         (i)      Where practicable, management will review with the Audit
                  Committee or the Chairman of the Audit Committee draft news
                  releases to be disseminated to the public related to earnings
                  warnings or financial results forecasting by the Corporation
                  which are expected by management to be material in relation
                  to the market price of any of the Corporation's securities.

(c)      Risk Identification and Management

The Audit Committee shall make all reasonable efforts to identify and address
material financial and other risks to the business and affairs of the
Corporation and its subsidiaries and make recommendations in that regard to the
Board of Directors of the Corporation. The Audit Committee shall review and
discuss with management, the internal audit department and the external auditor
all major financial risk exposures and the steps management has taken to
monitor/control those exposures. The Audit Committee shall be entitled, from
time to time, to retain experts and consultants to assist the Audit Committee
with the discharge of such mandate. The Audit Committee shall have the
discretion in the discharge of these duties to address risks to the
Corporation's and its subsidiaries' revenues and costs, as well as potentially
corrupt or other practices that may lead to loss or depreciation ob business
reputation.

(d)      Contingent Liabilities

The Audit Committee shall establish processes and procedures to identify and
monitor contingent liabilities of the Corporation and its subsidiaries. In the
discharge of these duties, the Audit Committee shall have the discretion to
retain experts and consultants and to review, without limitation, workplace
safety, environmental issues and any other matters, whether of a financial
nature or otherwise, that can give rise to a contingent liability. The Audit
Committee shall make recommendations, from time to time, to the Board of
Directors of the Corporation on these matters.

(e)      Corporate Authorizations Policies


<PAGE>
                                      A-7


         (i)      Periodically review and approve policies relative to the
                  financial control, conduct, regulation and administration of
                  subsidiary companies;

         (ii)     Periodically review the any administrative resolutions adopted
                  from time to time pursuant to the Corporation's By-laws
                  pertaining to the establishment of procedures relative to
                  commitment and transaction authorizations, the determination
                  of the officers or other persons by whom any instrument in
                  writing or document is to be executed and the manner of
                  execution thereof;

         (iii)    Review, monitor and approve the Corporate Donations Policy and
                  any changes thereto and the annual Corporate Donations Budget;
                  and

         (iv)     Review, monitor and approve any other financial expenditure
                  policies that would affect the Corporation's and its
                  subsidiaries' financial condition or reputation.

(f)      Performance to Budget

         (i)      Review actual financial performance compared to budget;

(g)      Meetings

         (i)      The Audit Committee shall meet at least quarterly at the call
                  of the Chairman of the Audit Committee, any other member of
                  the Audit Committee or the external auditors.

         (ii)     An "in-camera" session of the members of the Committee shall
                  be held as part of each meeting of the Committee.

(h)      Responsibilities

Nothing contained in the above mandate is intended to assign to the Audit
Committee the Board of Directors' responsibility to ensure the Corporation's
compliance with applicable laws or regulations or to expand applicable standards
of liability under statutory or regulatory requirements for the directors or the
members of the Audit Committee. Even though the Audit Committee has a specific
mandate and its members have financial experience and expertise, it is not the
duty of the Audit Committee to plan or conduct audits, or to determine that the
Corporation's financial statements are complete and accurate and are in
accordance with generally accepted accounting principles. Such matters are the
responsibility of management, the internal auditor and the external auditor.

Members of the Audit Committee are entitled to rely, absent knowledge to the
contrary, on (i) the integrity of the persons and organizations from whom they
receive information, (ii) the accuracy and completeness of the information
provided, and (iii) representations made by management as to the non-audit
services provided to the Corporation by the external auditor.






<PAGE>


                                                                Document No. 2


<PAGE>



PRICEWATERHOUSECOOPERS
-------------------------------------------------------------------------------
                                           |  PricewaterhouseCoopers LLP
                                           |  Chartered Accountants
                                           |  1250 Rene-Levesque Boulevard West
                                           |  Suite 2800
                                           |  Montreal, Quebec
                                           |  Canada H3B 2G4
                                           |  Telephone +1 514 205 5000
                                           |  Facsimile +1 514 876 1502




AUDITORS' REPORT


To the Shareholders of ACE Aviation Holdings Inc.


We have audited the consolidated statements of financial position of ACE
Aviation Holdings Inc. (the "Corporation") as at December 31, 2005 and 2004 and
the consolidated statements of operations and retained earnings and cash flows
for the year ended December 31, 2005 and the period from June 29, 2004, date of
incorporation, to December 31, 2004. These consolidated financial statements
are the responsibility of the Corporation's management. Our responsibility is
to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Corporation as at December 31,
2005 and 2004 and the results of its operations and the changes in its cash
flows for the year ended December 31, 2005 and the period from June 29, 2004 to
December 31, 2004 in accordance with Canadian generally accepted accounting
principles.


/s/ PricewaterhouseCoopers LLP


Chartered Accountants
February 9, 2006




PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers
LLP and the other member firms of PricewaterhouseCoopers International Limited,
each of which is a separate and independent legal entity.

<PAGE>


PRICEWATERHOUSECOOPERS




Comments by Auditors on Canadian/United States Reporting Differences


In the United States, reporting standards for auditors require the addition of
an explanatory paragraph when there is a change in accounting principles that
has a material effect on the comparability of the Corporation's financial
statements, such as the changes described in Note 2 and 23 to the financial
statements. In addition, the auditors' report would emphasize in a separate
paragraph certain matters regarding the financial statements such as those
described in Notes 2 and 20 to the consolidated financial statements.
Accordingly, it should be noted that the Ontario Superior Court of Justice
confirmed the consolidated plan of reorganization, compromise and arrangement
(the "Plan") of Air Canada and certain of its subsidiaries (the "Applicants"
and "Predecessor") on August 23, 2004. Confirmation of the Plan resulted in a
settlement of all claims against the Applicants that arose before April 1, 2003
and substantially altered the rights and interests of equity security holders
of Air Canada as provided for in the Plan. The Plan was substantially
consummated on September 30, 2004 and the Predecessor emerged from creditor
protection. In connection with the Predecessor's emergence from creditor
protection, creditors and shareholders received shares of ACE Aviation Holdings
Inc., a newly-formed holding company. As a result, consolidated financial
statements of ACE Aviation Holdings Inc. reflect a fresh start basis of
accounting as of September 30, 2004 as described in Note 20 to the consolidated
financial statements. Our report to the shareholders dated February 9, 2006 is
expressed in accordance with Canadian reporting standards which do not require
a reference to such changes in accounting principles or events in the auditors'
report when these are adequately disclosed in the financial statements.


/s/ PricewaterhouseCoopers LLP


Chartered Accountants
February 9, 2006

<PAGE>



PRICEWATERHOUSECOOPERS
-------------------------------------------------------------------------------
                                           |  PricewaterhouseCoopers LLP
                                           |  Chartered Accountants
                                           |  1250 Rene-Levesque Boulevard West
                                           |  Suite 2800
                                           |  Montreal, Quebec
                                           |  Canada H3B 2G4
                                           |  Telephone +1 514 205 5000
                                           |  Facsimile +1 514 876 1502




AUDITORS' REPORT


To the Shareholder of Air Canada


We have audited the consolidated statements of operations and retained earnings
and cash flows of Air Canada (the "Predecessor") for the nine-month period
ended September 30, 2004. These consolidated financial statements are the
responsibility of the Predecessor's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all
material respects, the results of the Predecessor's operations and the changes
in its cash flows for the nine-month period ended September 30, 2004 in
accordance with Canadian generally accepted accounting principles.


/s/ PricewaterhouseCoopers LLP



Chartered Accountants
February 9, 2006



PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers
LLP and the other member firms of PricewaterhouseCoopers International Limited,
each of which is a separate and independent legal entity.

<PAGE>
<TABLE>
<CAPTION>

ACE Aviation Holdings Inc.
Consolidated Statement of Operations and Retained Earnings
-------------------------------------------------------------------------------------------------------------------------------
(in millions except per share figures - Canadian dollars)                                             |
                                                                                                      |
                                                                                                      | Predecessor Company
                                                              Successor Company - ACE (Note 2)        | - Air Canada (note 2)
                                                              ----------------------------------------|------------------------
                                                                 Year Ended           Period Ended    |   Nine Months Ended
                                                              December 31, 2005    December 31, 2004  | September 30, 2004
                                                                                                      |
                                                             -----------------------------------------|------------------------
<S>                                                                  <C>                  <C>                  <C>
Operating revenues                                                                                    |
   Passenger                                                         $     8,269          $     1,681 |        $    5,628
   Cargo                                                                     620                  151 |               405
   Other                                                                     941                  230 |               805
                                                             -----------------------------------------|------------------------
                                                                           9,830                2,062 |             6,838
                                                              ----------------------------------------|------------------------
Operating expenses                                                                                    |
   Salaries, wages and benefits                                            2,520                  596 |             1,989
   Aircraft fuel                                                           2,198                  432 |             1,174
   Aircraft rent (note 2 dd)                                                 417                  111 |               521
   Airport and navigation fees                                               924                  198 |               616
   Aircraft maintenance, materials and supplies                              367                   78 |               265
   Communications and information technology                                 303                   66 |               236
   Food, beverages and supplies                                              334                   76 |               264
   Depreciation, amortization and obsolescence (note 2 dd)                   482                   85 |               312
   Commissions                                                               253                   65 |               240
   Other                                                                   1,580                  358 |             1,101
                                                             -----------------------------------------|------------------------
                                                                           9,378                2,065 |             6,718
                                                             -----------------------------------------|------------------------
                                                                                                      |
Operating income (loss) before reorganization                                                         |
   and restructuring items                                                   452                  (3) |               120
                                                                                                      |
   Reorganization and restructuring items (note 21)                            -                   -  |              (871)
                                                                                                      |
Non-operating income (expense)                                                                        |
   Dilution gain (note 13)                                                   190                    - |                 -
   Interest income                                                            66                   11 |                 6
   Interest expense                                                         (315)                 (60)|              (169)
   Interest capitalized                                                       14                    2 |                 -
   Loss on sale of and provisions on assets                                  (28)                   - |               (75)
   Other                                                                     (12)                   - |                (8)
                                                             -----------------------------------------|------------------------
                                                                            (85)                  (47)|              (246)
                                                             -----------------------------------------|------------------------
                                                                                                      |
Income (loss) before the following items                                     367                  (50)|              (997)
                                                                                                      |
Non-controlling interest (note 2)                                            (24)                   - |                 -
                                                                                                      |
Foreign exchange gain                                                         46                   78 |               104
                                                                                                      |
Provision for income taxes (note 8)                                         (131)                 (13)|                (2)
                                                             -----------------------------------------|------------------------
Income (loss) for the period                                         $       258          $        15 |        $     (895)
                                                             =========================================|========================
                                                                                                      |
Plan of arrangement and fresh start reporting (note 20)                        -                    - |             6,042
                                                                                                      |
Retained earnings (deficit), beginning of period                                                      |
as originally reported                                                        15                    - |            (5,147)
                                                                                                      |
Adjustment related to a change in accounting                                                          |
policy (note 2 dd)                                                           142                    - |                 -
                                                             -----------------------------------------|------------------------
                                                                                                      |
Retained earnings (deficit), beginning of period as restated                 157                    - |            (5,147)
                                                             -----------------------------------------|------------------------
                                                                                                      |
                                                                                                      |
Retained earnings, end of period                                     $       415          $        15 |        $        -
                                                             =========================================|========================
                                                                                                      |
Earnings (loss) per share (note 14)                                                                   |
   - Basic                                                           $      2.63          $      0.17 |        $    (7.45)
                                                             =========================================|========================
   - Diluted                                                         $      2.46          $      0.17 |        $    (7.45)
                                                             =========================================|========================

The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

ACE Aviation Holdings Inc.
Consolidated Statement of Financial Position
-------------------------------------------------------------------------------------------------------------------------

(in millions of Canadian dollars)
                                                                                      December 31          December 31
                                                                                          2005                2004
                                                                                 ----------------------------------------
<S>                                                                               <C>                      <C>

ASSETS

Current
   Cash and cash equivalents (note 13)                                            $             1,565      $       1,481
   Short-term investments (note 2 r)                                                              616                151
                                                                                 ----------------------------------------

                                                                                                2,181              1,632
   Restricted cash                                                                                 86                118
   Accounts receivable                                                                            637                547
   Spare parts, materials and supplies                                                            325                237
   Prepaid expenses and other current assets                                                      125                161
                                                                                 ----------------------------------------
                                                                                                3,354              2,695

Property and equipment (note 3)                                                                 5,494              3,684

Deferred charges (note 4)                                                                         145                167

Intangible assets (note 5)                                                                      2,462              2,703

Investments and other assets (note 6)                                                             392                137
                                                                                 ----------------------------------------

                                                                                  $            11,847      $       9,386
                                                                                 ========================================

LIABILITIES

  Current
   Accounts payable and accrued liabilities                                       $             1,355      $       1,197
   Advance ticket sales                                                                           711                579
   Aeroplan deferred revenues                                                                     680                622
   Current portion of long-term debt and capital lease obligations (note 7)                       265                218
                                                                                 ----------------------------------------
                                                                                                3,011              2,616

  Long-term debt and capital lease obligations (note 7)                                         3,543              2,328

  Convertible preferred shares (note 12)                                                          148                132

  Future income taxes (note 8)                                                                    221                243

  Pension and other benefit liabilities (note 9)                                                2,154              2,344

  Non-controlling interest                                                                        203                  -

  Other long-term liabilities (note 10)                                                         1,399              1,520
                                                                                 ----------------------------------------
                                                                                               10,679              9,183
                                                                                 ----------------------------------------
Commitments (note 16) Contingencies and Guarantees (note 18)

SHAREHOLDERS'  EQUITY

Share capital and other equity (note 12)                                                         747                 187

Contributed surplus                                                                                6                   1

Retained earnings                                                                                 415                 15
                                                                                 ----------------------------------------
                                                                                                1,168                203
                                                                                 ----------------------------------------
                                                                                  $            11,847      $       9,386
                                                                                 ========================================

The accompanying notes are an integral part of the consolidated financial statements.


   On behalf of the Board of
   Directors:



   /s/ Robert A. Milton                                                          /s/ David I. Richardson
   Robert A. Milton                                                              David I. Richardson
   Chairman, President and Chief Executive Officer                               Chairman of the Audit, Finance and
                                                                                 Risk Committee
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

ACE Aviation Holdings Inc.
Consolidated Statement of Cash Flow
----------------------------------------------------------------------------------------------------------------------------------
(in millions of Canadian dollars)


                                                                                                         |
                                                                                                         | Predecessor Company
                                                                   Successor Company - ACE (note 2)      | - Air Canada (note 2)
                                                                 ----------------------------------------|-----------------------
                                                                    Year Ended           Period Ended    |   Nine Months Ended
Cash flows from (used for)                                       December 31, 2005    December 31, 2004  | September 30, 2004
                                                                 ----------------------------------------|-----------------------
                                                                                                         |
                                                                                                         |
Operating                                                                                                |
<S>                                                                   <C>               <C>                 <C>
   Income (loss) for the period                                       $      258        $       15       |  $       (895)
                                                                                                         |
   Adjustments to reconcile to net cash provided by operations                                           |
         Reorganization and restructuring items (note 21)                      -                 -       |           786
         Depreciation, amortization and obsolescence                         482                85       |           312
         Loss on sale of and provisions on assets                             28                 -       |            75
         Dilution gain (note 13)                                            (190)                -       |             -
         Foreign exchange                                                    (83)              (98)      |          (104)
         Future income taxes                                                 116                11       |            (5)
         Employee future benefit funding (more than) less                                                |
            than expense                                                     (74)              (52)      |           126
         Decrease (increase) in accounts receivable                          (43)              269       |          (191)
         Decrease (increase) in spare parts, materials and supplies          (92)              (30)      |             -
         Increase (decrease) in accounts payable and                                                     |
            accrued liabilities                                               45              (256)      |            34
         Increase (decrease) in advance ticket sales, net                                                |
            of restricted cash                                               132               (77)      |           196
         Aircraft lease payments (in excess of) less than                                                |
            rent expense                                                      33               (14)      |           (31)
                                                                                                         |
   Other                                                                      63                35       |            57
                                                             --------------------------------------------|-----------------------
   Cash flows from (used for) operating activities before                                                |
      under noted items                                                      675              (112)      |           360
   Settlement of lease obligations (note 19)                                   -              (290)      |             -
   Rebate on lease settlement                                                  -                33       |             -
   Payment of restructuring obligation (note 19)                               -               (45)      |             -
   Fees conditional on emergence                                               -               (12)      |             -
                                                             --------------------------------------------|-----------------------
                                                                             675              (426)      |           360
                                                             --------------------------------------------|-----------------------
Financing                                                                                                |
   Issue of share capital (note 12)                                          452                 1       |             -
   Issue of convertible notes (note 7)                                       319                 -       |             -
   Issue of subsidiary units (note 13)                                       232                 -       |             -
   Aircraft related borrowings (note 7)                                      404                 -       |           233
   Credit facility borrowings (note 7)                                       300                 -       |            80
   Reduction of long-term debt and capital lease obligations                (894)              (67)      |          (358)
   Preferred shares issued to Cerberus for cash                                -               238       |             -
   Shares issued for cash under Rights Offering                                -               852       |             -
   GE DIP financing                                                            -              (300)      |            300
   Drawdown of Exit Financing                                                  -               527       |             -
   Distributions paid to non-controlling interest                             (8)                -       |             -
   Other                                                                      (4)                -       |            (2)
                                                             --------------------------------------------|-----------------------
                                                                             801             1,251       |           253
                                                             --------------------------------------------|-----------------------
Investing                                                                                                |
   Short-term investments                                                   (465)             (151)      |           186
   Sale of subsidiary units (note 13)                                         35                 -       |             -
   Additions to capital assets                                              (882)             (129)      |          (328)
   Proceeds from sale of assets                                               42                 -       |             2
   Cash collaterization of letters of credit                                 (35)              (21)      |             -
   Investment in US Airways (note 6)                                         (87)                -       |             -
                                                             --------------------------------------------|-----------------------
                                                                          (1,392)             (301)      |          (140)
                                                             --------------------------------------------|-----------------------
                                                                                                         |
Increase in cash and cash equivalents                                         84               524       |           473
                                                                                                         |
Cash and cash equivalents, beginning of period                             1,481                 -       |           484
                                                                                                         |
Cash and cash equivalents transferred                                                                    |
  to the Successor Company                                                     -               957       |          (957)
                                                             --------------------------------------------|-----------------------
                                                                                                         |
Cash and cash equivalents, end of period                          $        1,565       $     1,481       |  $          -
                                                             ============================================|=======================


Cash and cash equivalents exclude short-term investments of $616 as at December 31, 2005 ($151 as at December 31, 2004)

The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(currencies in millions - Canadian dollars)


1.   Nature of Operations

ACE Aviation Holdings Inc. ("ACE") incorporated on June 29, 2004, is the parent
holding company of various transportation and other service companies and
partnerships.

Reference to "Corporation" in the following notes to the consolidated financial
statements refers to, as the context may require, ACE and its subsidiaries
collectively, ACE and one or more of its subsidiaries, one or more of ACE's
subsidiaries, or ACE itself.

The Corporation's businesses on a consolidated basis are operated through four
reporting segments which include:

Transportation Services

Transportation services includes the Corporation's principal passenger and
cargo transportation services operated by Air Canada and related ancillary
services.

These services are provided through the Corporation's 100% ownership interest
in Air Canada, AC Cargo Limited Partnership ("Air Canada Cargo"), ACGHS Limited
Partnership ("ACGHS"), and Touram Limited Partnership ("Air Canada Vacations").
Effective September 30, 2004, the Transportation Services segment is
responsible for sales of transportation services provided by Jazz Air LP
("Jazz" or "Jazz LP") operated aircraft. The Transportation Services segment
includes the transportation revenues related to Jazz operated aircraft and
rental income from aircraft leased to Jazz by subsidiaries of Air Canada and
the costs related to fees paid to Jazz, as provided for under a capacity
purchase agreement.

Air Canada is Canada's largest domestic and international full-service airline
and the largest provider of scheduled passenger services in the domestic
market, the US transborder market as well as Canada-International markets.
Through Air Canada's global route network, virtually every major market
throughout the world is served either directly or through the Star Alliance
network. Air Canada is a founding member of the Star Alliance network which is
the world's largest airline alliance group.

Air Canada and Air Canada Cargo provide air cargo services on domestic,
transborder and international flights. Air Canada Cargo is a major domestic air
cargo carrier and uses the entire cargo capacity on aircraft operated by Air
Canada and Jazz on domestic and transborder routes. Air Canada offers cargo
services on its international flights.

ACGHS provides passenger handling services to Air Canada, Jazz and other
airlines with a primary focus on Canadian stations. Services covered include
"above and below the wing" passenger and baggage handling services and
ancillary services such as de-icing, ground support, and equipment maintenance.

Air Canada Vacations is a major Canadian tour operator providing vacation
packages which include air transportation supplied by Air Canada, hotel
accommodations, car rentals and cruises.

Aeroplan Limited Partnership

The Corporation holds an 85.6% ownership in Aeroplan Limited Partnership
("Aeroplan" or "Aeroplan LP"). Aeroplan is a premier loyalty program which
offers miles accumulation and redemption as

<PAGE>


an incentive to the Corporation's and other partners' customers. Accumulated
mileage may be redeemed for travel rewards or for goods and services from
non-airline partners.

Jazz Air LP

The Corporation holds a 100% ownership in Jazz as at December 31, 2005 (see
note 24 Subsequent Event). Jazz is responsible for regional operations and
provides service throughout Canada and to certain destinations in the United
States under a capacity purchase agreement between Air Canada and Jazz that
came into effect September 30, 2004. Under the capacity purchase agreement,
Jazz focuses on flight operations and customer service and Air Canada is
responsible for scheduling, marketing, pricing and related commercial
activities of the regional operations. Under this agreement, Jazz records
revenues from Air Canada based upon fees relating to flight operations
performed, passengers carried and other items covered by the agreement. These
inter-company transactions are eliminated in the consolidated financial
statements.

ACTS Limited Partnership

The Corporation holds a 100% ownership in ACTS Limited Partnership ("ACTS" or
"ACTS LP"). ACTS provides technical services and competes on a global basis as
an aircraft maintenance, repair and overhaul service provider.

Financial information on ACE operating segments is outlined in note 15, Segment
Information.

Other

In addition to the above segments, ACE holds a 6% investment in US Airways
Group Inc. (see note 6).

Reorganization of Air Canada

On September 30, 2004, Air Canada, and certain subsidiaries, emerged from
creditor protection under the provisions of the Companies' Creditors
Arrangement Act (Canada) ("CCAA") as explained in notes 19 to 22.


<PAGE>


2.   Basis of Presentation and Summary of Significant Accounting Policies

The consolidated financial statements are expressed in millions of Canadian
dollars and are prepared in accordance with generally accepted accounting
principles ("GAAP") in Canada. The accounting policies of ACE are consistent
with those of Air Canada and its subsidiaries prior to September 30, 2004
("Predecessor Company"), with the exception of the fair value adjustments
applied under fresh start reporting and certain accounting policies as outlined
below.

a)  Basis of Presentation

In accordance with Section 1625 of the CICA Handbook, Comprehensive Revaluation
of Assets and Liabilities ("CICA 1625"), ACE adopted fresh start reporting on
September 30, 2004. References to "Predecessor Company" in these consolidated
financial statements and notes thereto refer to Air Canada and its subsidiaries
prior to September 30, 2004. References to "Successor Company" refer to ACE and
its subsidiaries on and after June 29, 2004. In accordance with CICA 1625,
prior period financial information has not been restated to reflect the impact
of the fair value adjustments, and accordingly certain amounts in the
Predecessor Company's results are not directly comparable with those of the
Corporation. See note 20 for information related to fresh start reporting.

The consolidated statement of financial position as of December 31, 2005 and
December 31, 2004 represents the accounts of the Corporation. The consolidated
statement of operations for the year ended December 31, 2005, and the period
from incorporation of ACE to December 31, 2004 reflects the operations of the
Corporation; the nine months ended September 30, 2004 reflect the results of
operations of the Predecessor Company. The consolidated statement of cash flow
for the year ended December 31, 2005, and the period from incorporation of ACE
to December 31, 2004 reflects the cash flows of the Corporation. The nine
months ended September 30, 2004 reflect the cash flows of the Predecessor
Company.

For the nine months ended September 30, 2004, while Air Canada and certain of
its subsidiaries operated under CCAA proceedings, the Predecessor Company
followed accounting policies, including disclosures, applicable to entities
under creditor protection. In addition to generally accepted accounting
principles applicable in Canada, the Predecessor Company applied the guidance
in American Institute of Certified Public Accountant Statement of Position
90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code" (SoP 90-7). Accordingly, revenues, expenses (including professional
fees), realized gains and losses and provisions for losses directly associated
with the reorganization and restructuring of the business were reported
separately as reorganization items.

For the nine months ended September 30, 2004, interest expense on compromised
liabilities was reported only to the extent that it would be paid under the
Plan or that it was probable that it would be an allowed claim. Cash flows
related to reorganization items have been disclosed separately in the
consolidated statement of cash flows. Consolidated financial statements that
include one or more entities in reorganization proceedings and one or more
entities not in reorganization proceedings include disclosure of condensed
combined financial statements of the entities in reorganization proceedings,
including disclosure of the amount of intercompany receivables and payables
therein between Applicants and non-Applicants. This information is presented in
note 22.

b)  Basis of Valuation

With the application of fresh start reporting on September 30, 2004 by the
Corporation, all assets and liabilities, except for future income taxes, were
reported at fair values as further described in note 20. Goodwill is not
recorded under GAAP applicable to fresh start reporting. In addition, the
estimated useful lives of certain assets were also adjusted, including
buildings where useful lives were extended to periods not exceeding 50 years.


<PAGE>


c)  Principles of Consolidation

These consolidated financial statements include the accounts of the Predecessor
Company and its subsidiaries and the Corporation and its subsidiaries with
provision for non-controlling interests. For the periods beginning January 1,
2005, the consolidated financial statements of the Corporation include the
accounts of entities for which the Corporation is the primary beneficiary. All
intercompany balances and transactions are eliminated.

d)  Use of Estimates

The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ
from those estimates.

e)  Air Transportation Revenues

Airline passenger and cargo advance sales are deferred and included in current
liabilities. Passenger and cargo revenues are recognized when the
transportation is provided, except for revenue on unlimited flight passes which
is recognized on a straight-line basis over the period during which the travel
pass is valid. The Corporation has formed alliances with other airlines
encompassing loyalty program participation, code sharing and coordination of
services including reservations, baggage handling and flight schedules.
Revenues are allocated based upon formulas specified in the agreements and are
recognized as transportation is provided. As described further under Aeroplan
Loyalty Program, beginning September 30, 2004, the estimated fair value of
Aeroplan Miles earned through qualifying air travel is deferred at the time the
qualifying air travel is provided. Deferred revenues from the issue of Miles
("Miles") to customers, including Miles sold to loyalty program partners are
recorded as passenger revenues when the transportation is provided. Redemptions
for non-passenger services are included in other revenues.

The Corporation performs regular evaluations on the deferred revenue liability
which may result in adjustments being recognized as revenue. Due to the complex
pricing structures; the complex nature of interline and other commercial
agreements used throughout the industry; historical experience over a period of
many years; and other factors including refunds, exchanges and unused tickets,
certain relatively small amounts are recognized as revenue based on estimates.
Events and circumstances may result in actual results that are different from
estimates, however these differences have historically not been material.

f)  Capacity Purchase Agreements

The Corporation has capacity purchase agreements with certain unaffiliated
regional carriers, which are referred to as Tier III carriers, operating
aircraft of 18 seats or less. Under these agreements, the Corporation is
responsible for the marketing, ticketing and commercial arrangements relating
to these flights and records the earned revenues in passenger revenue. For the
year ended December 31, 2005, passenger revenues under capacity purchase
agreements with Tier III carriers amounted to $70 in the Corporation. During
the three months ended December 31, 2004, passenger revenues under capacity
purchase agreements with Tier III carriers amounted to $16 in the Corporation
and $46 in the Predecessor Company for the nine months ended September 30,
2004. Operating expenses are recorded primarily in the aircraft fuel, airport
and navigation fees and other operating expense categories.

<PAGE>


g)  Aeroplan Loyalty Program

As a result of the application of fresh start reporting, the outstanding
loyalty program mileage credits were adjusted to reflect the estimated fair
value of Miles to be redeemed in the future. As a consequence of this fair
value adjustment and the evolving nature of the Aeroplan loyalty program, the
Corporation changed the accounting policy as of September 30, 2004 for the
recognition of its obligations relating to the loyalty program. The Predecessor
Company recognized the obligation related to Miles earned through
transportation services based on the incremental cost of providing future
transportation services. On a prospective basis from the date of fresh start
reporting, Miles earned by members through transportation services provided by
the Corporation and the transportation services are treated as multiple
elements. Miles are recorded at fair values with the residual allocated to
transportation services. Consistent with the accounting policy of the
Predecessor Company, the proceeds from the sale of Miles to loyalty program
partners are deferred.

Revenues from Miles issued to members are recognized at the time the Miles are
redeemed except for breakage as noted below. Effective September 30, 2004,
Miles redeemed for travel on Air Canada and Jazz are included in Passenger
revenue and Miles redeemed for other than travel are included in Other
revenues. Under the previous accounting policy in the Predecessor Company,
Aeroplan redemption revenues from Miles earned by members through loyalty
program partners were included in Other revenues. These revenues amounted to
$173 for the nine months ended September 30, 2004.

Based on historical experience and current program policies the Corporation
estimates the percentage of Miles that may never be redeemed, defined as
breakage. Breakage is estimated by the Corporation based on the terms and
conditions of membership and historical accumulation and redemption patterns as
adjusted for changes to any terms and conditions that affect members'
redemption practices. The estimated breakage factor used is 17% since September
2004 and 19% prior to September 2004. The cumulative adjustment resulting from
this change in estimate was recognized in 2004 as a reduction in revenue
amounting to $18, including $9 related to prior periods and $9 related to 2004.
Changes in the breakage factor are accounted for as follows: in the period of
change, the deferred revenue balance is adjusted as if the revised estimate had
been used in prior periods with the offsetting amount recorded as an adjustment
to Other revenues; and for subsequent periods, the revised estimate is used.
The amount allocated to breakage is recognized in Other revenues on a straight
line basis over a period of 30 months, which is the estimated average life of a
Mile.

The current portion of Aeroplan loyalty program deferred revenues of $680 ($622
at December 31, 2004) is based on Management's estimate as to the portion of
the liabilities that will be redeemed in the next twelve months. The remainder
of the liabilities is carried in Other long-term liabilities.

h)  Non-Transportation Revenues

Non-transportation revenue includes certain loyalty program revenues, as
described above, as well as revenues from technical services maintenance and
other airline related services. The Predecessor Company recorded all loyalty
program revenues under non-transportation revenues prior to September 30, 2004.

Revenues relating to airframe maintenance services are recognized as the
services are performed. Revenues and costs relating to engine and component
maintenance services are deferred and only recognized once the work has been
completed.

<PAGE>

Certain maintenance contracts are referred to as power by the hour whereby the
customer makes payments based on their aircraft utilization. Customer receipts
under a power by the hour contract are deferred in current liabilities and
recognized as revenues as maintenance services are performed.

Other airline related service revenues are recognized as services are provided.

i)   Employee Future Benefits

The significant policies related to employee future benefits are as follows:

o    The cost of pensions and other post-retirement benefits earned by
     employees is actuarially determined using the projected benefit method
     prorated on service, market interest rates, and management's best estimate
     of expected plan investment performance, salary escalation, retirement
     ages of employees and expected health care costs.
o    A market-related value method is used to value plan assets for the purpose
     of calculating the expected return on plan assets. Under the selected
     method, the differences between investment returns during a given year and
     the expected investment returns are amortized on a straight line basis
     over 4 years.
o    Past service costs arising from plan amendments are amortized on a
     straight-line basis over the average remaining service period of employees
     active at the date of amendment. This period does not exceed the average
     remaining service period of such employees up to the full eligibility
     date.
o    Cumulative unrecognized net actuarial gains and losses in excess of 10% of
     the greater of the projected benefit obligation or market-related value of
     plan assets at the beginning of the year are amortized over the remaining
     service period of active employees.

j)   Stock-Based Compensation Plans

The Corporation has a stock option plan as described in note 11. The fair value
of stock options granted is recognized as a charge to salary and wages expense
on a straight line basis over the applicable vesting period, with an offset to
contributed surplus. The amount of compensation cost recognized at any date at
least equals the value of the vested portion of the options at that date. When
stock options are exercised, the consideration paid by employees, together with
the amount in contributed surplus, is credited to share capital.

The Corporation also maintains an employee share purchase plan under which
employee contributions are matched by a plan specific percentage by the
Corporation.

k)   Employee Profit Sharing Plan

The Corporation has implemented an employee profit sharing plan which is
calculated annually on full calendar year results and recorded throughout the
year as a charge to salary and wage expense based on the estimated annual
payment under the plan.

l)   Maintenance and Repairs

Maintenance and repair costs are charged to operating expenses as incurred,
with the exception of maintenance and repair costs related to return conditions
on short-term aircraft leases, which are accrued over the term of the lease.

m)   Other Operating Expenses

Included in other operating expenses are expenses related to building rent and
maintenance, terminal handling, professional fees and services, crew meals and
hotels, advertising and promotion, insurance costs, credit card fees, Aeroplan
Miles redeemed for other than travel, and other expenses. Expenses are
recognized as incurred.


<PAGE>


n)   Financial Instruments and Hedging Activities

Under the Corporation's risk management policy, derivative financial
instruments are used only for risk management purposes, not for generating
trading profits. When the Corporation utilizes derivatives in hedge accounting
relationships, the Corporation identifies, designates and documents those
transactions and regularly tests the transactions to demonstrate effectiveness
in order to continue hedge accounting. To the extent that a derivative
financial instrument does not qualify for hedge accounting or for those that
are not designated as hedges, the fair value of the derivative financial
instrument is recorded on the consolidated statement of financial position and
changes in its fair value are recorded in income in the period when the change
occurs.

Changes in the fair value of foreign currency forward contracts and option
agreements, used for foreign exchange risk management but not designated as
hedges for accounting purposes, are recorded in foreign exchange gain (loss).
These contracts are included on the consolidated statement of financial
position at fair value in Other assets and Other long-term liabilities.

Changes in the fair value of currency swap agreements, used for foreign
exchange risk management and not designated as hedges for accounting purposes,
are recorded in foreign exchange gain (loss). These contracts are included on
the consolidated statement of financial position at fair value in Other assets
and Other long-term liabilities.

The Corporation from time to time enters into interest rate swaps to manage the
risks associated with interest rate movement on US and Canadian floating rate
debt and investments. Changes in the fair value of these swap agreements, which
are not designated as hedges for accounting purposes, are recognized in income
in Other non-operating income and are recorded on the statement of financial
position in Other assets and Other long-term liabilities.

Derivatives under the fuel-hedging program are designated as hedges for
accounting purposes and hedge accounting is being applied prospectively from
October 1, 2005. Under hedge accounting, gains or losses on fuel hedging
contracts are recognized in earnings as a component of aircraft fuel expense
when the underlying jet fuel being hedged is consumed. Premiums paid for option
contracts and the excluded time value of the options is deferred as a cost of
the hedge on the balance sheet in Other assets and recognized in the income
statement at the same time as the hedged jet fuel is consumed. Similarly, the
value of the derivatives previously measured at fair value where the
Corporation did not apply hedge accounting is also treated as a cost of the
hedge and accounted for in the same way. The intrinsic value of the options and
any new derivatives contracts fair values excluding time value are treated as
an off-balance sheet item. Prior to these derivative instruments being
designated as hedges for accounting purposes, gains or losses were recorded in
other non-operating expense.

The Corporation will discontinue hedge accounting when the hedge item matures,
expires, is sold, terminated, cancelled or exercised, the Corporation
terminates its designation of the hedging relationship, the hedging
relationship ceases to be effective, or the anticipated transaction is no
longer probable.

When a hedging item ceases to exist and is not replaced, any gain, losses,
revenue or expenses associated with the hedging item that have been deferred
previously as a result of applying hedge accounting are carried forward to be
recognized in income in the same period as the corresponding gains, losses,
revenues or expenses associated with the hedged item.

When a hedged item ceases to exist or an anticipated transaction is no longer
probable, any gains, losses, revenues or expenses associated with the hedging
item that had been deferred previously as a result of hedge accounting are
realized in the current period's statement of operations.

<PAGE>


o)   Foreign Currency Translation

Monetary assets and liabilities denominated in foreign currencies are
translated into Canadian dollars at rates of exchange in effect at the date of
the consolidated statement of financial position. Net gains of $46 are included
in income in the Corporation for the twelve months ended December 31, 2005. Net
gains of $78 are included in income in the Corporation for the period ended
December 31, 2004. Gains of $190 are included in income in the Predecessor
Company for the nine months ended September 30, 2004, of which $84 is included
in Reorganization and restructuring items. Non-monetary assets, non-monetary
liabilities, revenues and expenses arising from transactions denominated in
foreign currencies, are translated at rates of exchange in effect at the date
of the transaction.

p)   Income Taxes

The Corporation utilizes the liability method of accounting for income taxes
under which future income tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amount and the tax basis of assets and
liabilities. Future income tax assets and liabilities are measured using
substantively enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on future
income tax assets and liabilities of a change in tax rates is recognized in
earnings in the period that includes the enactment date. Future income tax
assets are recognized to the extent that realization is considered more likely
than not. The benefit of future income tax assets that existed at fresh start,
and for which a valuation allowance is recorded, will be recognized first to
reduce to nil any remaining intangible assets (on a pro-rata basis) that were
recorded upon fresh start reporting with any remaining amount as a credit to
shareholders' equity. The benefit of future income tax assets that arise after
fresh start will be recognized in the income statement.

q)   Cash and Cash Equivalents

Cash includes investments with original maturities of three months or less of
$1,540 (2004 $1,406). Investments, comprised of bankers acceptances, bankers
discount notes, and commercial paper may be liquidated promptly and have
maturities of three months or less at the date of purchase. The weighted
average interest rate on investments as at December 31, 2005 is 3.31% (2004
2.6%).

r)   Short-term Investments

Short-term investments, comprised of bankers acceptances and bankers discount
notes, have original maturities over three months, but not more than one year.
The weighted average interest rate on short-term investments as at December 31,
2005 is 3.04% (2004 2.6%)

s)   Restricted Cash

As at December 31, 2005, the Corporation has recorded $86 (2004 $118) in
restricted cash, under current assets, representing funds held in trust by Air
Canada Vacations in accordance with regulatory requirements governing advance
ticket sales, recorded under current liabilities, for certain travel related
activities.

<PAGE>


t)   Spare Parts, Materials and Supplies

Spare parts, materials and supplies are valued at the lower of average cost and
net realizable value. A provision for the obsolescence of flight equipment
spare parts is accumulated over the estimated service lives of the related
flight equipment to a 30% residual value.

u)   Property and Equipment

Property and equipment is originally recorded at cost. Property under capital
leases and the related obligation for future lease payments are initially
recorded at an amount equal to the lesser of fair value of the property or
equipment and the present value of those lease payments. On September 30, 2004,
the estimated useful lives of certain assets were adjusted, including buildings
where useful lives were extended to periods not exceeding 50 years.

Property and equipment are depreciated to estimated residual values based on
the straight-line method over their estimated service lives. Property and
equipment under capital leases and variable interest entities are depreciated
to estimated residual values over the life of the lease. Air Canada aircraft
and flight equipment are depreciated over 20 to 25 years, with 10 to 15%
estimated residual values. Jazz aircraft and flight equipment are depreciated
over 20 to 30 years, with 20% estimated residual values. Aircraft
reconfiguration costs are amortized over 3 years. Betterments to owned aircraft
are capitalized and amortized over the remaining service life of the aircraft.
Betterments to aircraft on operating leases are amortized over the term of the
lease.

Buildings are depreciated over their useful lives not exceeding 50 years on a
straight line basis (30 years in the Predecessor Company). An exception to this
is where the useful life of the building is greater than the term of the land
lease. In these circumstances, the building is depreciated over the life of the
lease. Leasehold improvements are amortized over the lesser of the lease term
or 5 years. Ground equipment is depreciated over 3 to 25 years (5 to 25 years
in the Predecessor Company). Computer equipment is depreciated over 3 years (5
years in the Predecessor Company).

v)   Interest Capitalized

Interest on funds used to finance the acquisition of new flight equipment and
other property and equipment is capitalized for periods preceding the dates
that the assets are available for service.

w)   Deferred Financing Costs

Deferred financing costs are amortized on an effective interest basis over the
term of the related obligation.

x)   Intangible Assets

As a result of the application of fresh start reporting, intangible assets were
recorded at their estimated fair values at September 30, 2004. Indefinite life
assets are not amortized while assets with finite lives are amortized to nil
over their estimated useful lives.


<PAGE>


                                                          Estimated Useful Life
                                                          ---------------------
International route rights and slots                      Indefinite
Air Canada trade name                                     Indefinite
Aeroplan trade name                                       Indefinite
Other marketing based trade names                         Indefinite
Aeroplan contracts                                        25 years
Star Alliance membership                                  25 years
Other contract and customer based intangible assets       10 to 15 years
Technology based intangible assets                        1 to 25 years

y)   Impairment of Long-Lived Assets

Long-lived assets are tested for impairment whenever the circumstances indicate
that the carrying value may not be recoverable. When events or circumstances
indicate that the carrying amount of long-lived assets are not recoverable, the
long-lived assets are tested for impairment by comparing the estimate of future
expected cash flows to the carrying amount of the assets or groups of assets.
If the carrying value is not recoverable from future expected cash flows, any
loss is measured as the amount by which the asset's carrying value exceeds fair
value. Recoverability is assessed relative to undiscounted cash flows from the
direct use and disposition of the asset or group of assets.

Indefinite-lived intangible assets are also subject to annual impairment tests
under GAAP. If the carrying value of such assets exceeds the fair values, the
assets are written down to fair value.

z)   Investments

Investments not subject to significant influence are carried at cost and any
declines in value that are determined to be other than temporary are included
in earnings. Earnings from such investments are recognized only to the extent
received or receivable.

aa)  Aircraft Lease Payments in Excess of or Less Than Rent Expense

Total aircraft operating lease rentals over the lease term are amortized to
operating expense on a straight-line basis. Included in deferred charges and
long-term liabilities is the difference between the straight line aircraft rent
expense and the payments as stipulated under the lease agreement. On fresh
start accounting, an intangible asset related to leases, included in deferred
charges, was recognized based on the fair value of shares issued to lessors as
a result of the claim on renegotiated lease agreements and the allocation of
lease damages paid to GE as described in Note 19.

When there is an expected deficiency under a residual value guarantee in an
aircraft operating lease, the Corporation accrues the deficiency over the
remaining lease term. Any accruals for residual value guarantees are included
in other long-term liabilities. As a result of the adoption of AcG-15 as
described below, the Corporation no longer has any residual value guarantees
under any of its aircraft leasing agreements accounted for as operating leases.


<PAGE>


bb)  Asset Retirement Obligations

The Corporation records an asset and related liability for the costs associated
with the retirement of long-lived tangible assets when a legal liability to
retire such assets exists. The fair value of a liability for an asset
retirement obligation is recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset
and then amortized over its estimated useful life. In subsequent periods, the
asset retirement obligation is adjusted for the passage of time and any changes
in the amount of the underlying cash flows through charges to earnings. A gain
or loss may be incurred upon settlement of the liability.

cc)  Comparative Figures

Certain prior period's information was reclassified to conform with the current
year's presentation.

dd)  Change in Accounting Policies

The Corporation adopted Accounting Guideline 15 - Consolidation of Variable
Interest Entities (AcG-15) effective January 1, 2005. AcG-15 relates to the
application of consolidation principles to certain entities that are subject to
control on a basis other than ownership of voting interests. The purpose of
AcG-15 is to provide guidance for determining when an enterprise includes the
assets, liabilities and results of activities of such an entity (a "variable
interest entity") in its consolidated financial statements.

An entity is classified a variable interest entity ("VIE") under AcG-15 if it
has (1) equity that is insufficient to permit the entity to finance its
activities without additional subordinated financial support from other
parties; or (2) equity investors that cannot make significant decisions about
the entity's operations, or that do not absorb the expected losses or receive
the expected returns of the entity. A VIE is consolidated by its primary
beneficiary, which is the party involved with the VIE that will absorb a
majority of the expected losses or will receive the majority of the expected
residual returns or both, as a result of ownership, contractual or other
financial interests in the VIE.

Aircraft and Engine Leasing Transactions

Air Canada has entered into aircraft and engine leasing transactions with a
number of special purpose entities that are VIEs under AcG-15. As a result of
the adoption of AcG-15 and Air Canada being the primary beneficiary of these
VIEs, the Corporation consolidated leasing entities covering 51 aircraft and 22
engines previously accounted for as operating leases. The following adjustments
to the consolidated statement of financial position as at January 1, 2005
result from consolidating these lease structures on initial adoption of AcG-15:

<PAGE>

                                                                 Liabilities
                                                                     and
                                                                 Shareholders'
                                                       Assets      Assets
                                                    ------------  -------------
Increase to property and equipment                    $1,304
Decrease to deferred charges                             (45)
Decrease to intangible assets                             (6)
Increase to other assets                                 113
Increase to current portion of long-term debt                          $77
Increase to long-term debt                                           1,173
Increase to non-controlling interest                                   181
Decrease to other long-term liabilities                               (155)
Cumulative effect of change in accounting policy                        90
                                                    ------------  -------------
                                                      $1,366        $1,366



The increase to other assets represents restricted cash held in the VIEs and
the fair value of a currency swap arrangement of $7 in favour of the
Corporation, taking into account foreign exchange rates in effect as at
December 31, 2004. This currency swap was put in place on the inception of the
leases for 11 Canadair Regional Jet aircraft. This currency swap has not been
designated as a hedge for accounting purposes.

Fuel Facilities Arrangements

Air Canada and Jazz participate in fuel facilities arrangements, along with
other airlines to contract for fuel services at various Canadian airports. The
Fuel Facilities Corporations are organizations incorporated under federal or
provincial business corporations acts in order to acquire, finance and lease
assets used in connection with the fuelling of aircraft and ground support
equipment. The Fuel Facilities Corporations operate on a cost recovery basis.

Under AcG-15, the Corporation is the primary beneficiary of certain of the Fuel
Facilities Corporations. On January 1, 2005 the Corporation consolidated three
Fuel Facilities Corporations, resulting in the following adjustments:


                                                                 Liabilities
                                                                     and
                                                                 Shareholders'
                                                       Assets      Assets
                                                    ------------ --------------
Increase to property and equipment                      $113
Increase to long-term debt                                             $51
Increase to non-controlling interest                                     8
Increase to other long-term liabilities                                  2
Cumulative effect of change in accounting policy                        52
                                                    ------------ --------------
                                                        $113          $113


The remaining five Fuel Facilities Corporations in Canada that have not been
consolidated have assets of approximately $107 and debt of approximately $87,
which is the Corporation's maximum exposure to loss without taking into
consideration any cost sharing and asset retirement obligations that would
occur amongst the other contracting airlines. The Corporation views this loss
potential as remote.

Effect in the Current Period

For the year ended December 31, 2005, the net impact of adopting AcG-15 was a
before tax charge of $42 ($0.43 per share, basic). This impact is a result of
depreciation expense of $86, net interest expense of $88, foreign exchange gain
of $26 and non-controlling interest charge of $14 offset by reduced aircraft
rent of $120.

<PAGE>



Prior Periods

The comparative financial information for prior periods has not been restated.
The cumulative effect to retained earnings on the adoption of AcG-15 as at
January 1, 2005 is an increase of $142.

ee)  Future Accounting Standard Changes

The following is an overview of accounting standard changes that the
Corporation will be required to adopt in future years:

Financial Instruments and Hedges

The Accounting Standards Board has issued three new standards dealing with
financial instruments: (i) Financial Instruments - Recognition and Measurement
(ii) Hedges and (iii) Comprehensive Income. The key principles under these
standards are that all financial instruments, including derivatives, are to be
included on a company's balance sheet and measured, either at their fair values
or, in limited circumstances when fair value may not be considered most
relevant, at cost or amortized cost. Financial instruments intended to be
held-to-maturity should be measured at amortized cost. Existing requirements
for hedge accounting are extended to specify how hedge accounting should be
performed. Also, a new location for recognizing certain unrealized gains and
losses - other comprehensive income - has been introduced. This provides an
ability for certain unrealized gains and losses arising from changes in fair
value to be temporarily recorded outside the income statement but in a
transparent manner. The new standards are effective for the Corporation
beginning January 1, 2007. The standards do not permit restatement of prior
years' financial statements, however, the standards have detailed transition
provisions. As the Corporation has financial instruments, implementation
planning will be necessary to review the new standards to determine the
consequences for the Corporation. Accordingly, the Corporation has not yet
evaluated all of the consequences of the new standards; however, the adoption
of the standards may have a material impact on the Corporation's balance sheet.


<PAGE>


3.   Property and Equipment

                                                           2005            2004
Cost
    Flight equipment                                  $   1,703       $   1,179
    Flight equipment consolidated under AcG-15            1,304               -
    Capital leases (a)                                    1,758           1,758
    Buildings and leasehold improvements                    534             520
    Fuel facilities consolidated under AcG-15               115               -
    Ground equipment and other                              161             164
    Computer equipment                                        4               1
                                                    ----------------------------
                                                          5,579           3,622
                                                    ---------------------------

Accumulated depreciation and amortization
    Flight equipment                                        104              18
    Flight equipment consolidated under AcG-15               80               -
    Capital leases (a)                                      142              22
    Buildings and leasehold improvements                     48              10
    Fuel facilities consolidated under AcG-15                 6               -
    Ground equipment and other                               26               5
    Computer equipment                                        3               -
                                                    ----------------------------
                                                            409              55
                                                    ----------------------------

                                                          5,170           3,567

Purchase deposits (b)                                       324             117
                                                    ----------------------------

Property and equipment at net book value              $   5,494       $   3,684
                                                    ----------------------------

a)   Included in capital leases are 35 aircraft (2004 - 35) with a cost of
     $1,684 (2004 - $1,684) less accumulated depreciation of $130 (2004 - $20)
     for a net book value of $1,554 (2004 - $1,664), computer equipment with a
     cost of $28 (2004 - $28) less accumulated depreciation of $9 (2004 - $2)
     for a net book value of $19 (2004 - $26) and facilities with a cost of $46
     (2004 - $46) less accumulated depreciation of $3 (2004 - nil) for a net
     book value of $43 (2004 - $46).

b)   Includes $189 for Boeing B777/787 aircraft, $65 for Embraer aircraft and
     $70 for equipment purchases and internal projects.

Interest capitalized for the year ended December 31, 2005 amounted to $14 using
the Corporation's weighted average cost of capital. Interest capitalized for
the period ended December 31, 2004 amounted to $2. No interest was capitalized
during the nine months ended September 30, 2004 by the Predecessor Company.

During the year ended December 31, 2005, the Corporation recorded depreciation
expense of $374. During the period ended December 31, 2004, the Corporation
recorded depreciation expense of $65 and during the nine months ended September
30, 2004, the Predecessor Company recorded depreciation expense of $259.

During the year ended December 31, 2005, the Corporation recorded provisions of
$17, including $13 for spare parts. During the nine months ended September 30,
2004, the Predecessor Company recorded provisions of $75 relating mainly to
non-operating aircraft, including $18 for spare parts. The provisions reflect
the excess of the carrying value over fair value.

<PAGE>


As at December 31, 2005, flight equipment included 32 aircraft (2004 - 57)
which are retired from active service with a net book value of $10 (2004- $6)
which approximates fair value.

<PAGE>



4.   Deferred Charges

                                            2005              2004

Aircraft lease payments in excess
 of rent expense (a)                    $    106          $    141

Financing costs                               39                26
                                      -----------------------------
                                        $    145          $    167
                                      -----------------------------

a) The deferred charge related to aircraft lease payments in excess of rent
expense includes the fair value of shares issued to lessors as a result of the
claim on renegotiated lease agreements and the allocation of lease damages paid
to GECC as further described in note 19, less the net amortization recorded.
This deferred charge is amortized to Aircraft rent over the term of the lease
agreements.


<PAGE>



5.   Intangible Assets


                                                         2005          2004
Indefinite life assets
    International route rights and slots             $    653      $    688
    Air Canada trade name                                 595           628
    Aeroplan trade name                                   109           135
    Other marketing based trade names                     118           131
                                                ----------------------------
                                                        1,475         1,582
                                                ----------------------------
Finite life assets
    Aeroplan contracts                                    407           499
    Star Alliance membership                              239           246
    Other contract and customer base                      247           260
    Technology based                                      206           133
                                                ----------------------------
                                                        1,099         1,138
Accumulated amortization
    Aeroplan contracts                                    (23)           (3)
    Star Alliance membership                              (12)           (1)
    Other contract and customer based                     (40)           (7)
    Technology based                                      (37)           (6)
                                                ----------------------------
                                                          987         1,121
                                                ----------------------------

                                                    $   2,462     $   2,703
                                                ----------------------------


As a result of recognizing the benefit during the year ended December 31, 2005
of future income tax assets that existed at fresh start, and for which a
valuation allowance was recorded, intangible assets were reduced on a pro-rata
basis by $138 ($11 for the period ended December 31, 2004). As a result of the
dilution gain as described in note 13, intangible assets related to Aeroplan
were reduced by $77.

For the year ended December 31, 2005, the Corporation recorded amortization
expense of $95. During the period ended December 31, 2004, the Corporation
recorded amortization expense of $17 and during the nine months ended September
30, 2004, the Predecessor Company recorded amortization expense of $39.


<PAGE>


6.   Investments and Other Assets

                                                              2005       2004

Investment in US Airways Group Inc. (a)                   $     87    $     -

Aircraft related deposits and derivatives                      167         40

Collateral under letters of credit and other deposits          127         54

Directors' and Officers' Trust (b)                               -         32

Other                                                           11         11

                                                         ---------------------
                                                          $    392    $   137
                                                         ---------------------


a)   On September 27, 2005, the Corporation invested $87 (US$75) in US Airways
     Group Inc. ("US Airways") in conjunction with the carrier's exit from US
     bankruptcy proceedings. The Corporation's investment represented
     approximately 7% of the equity of US Airways at the closing date. The
     equity investment is subject to a six month holding period from the
     closing date. This investment has been accounted for using the cost
     method. As at December 31, 2005, the market value of the investment was
     $217. In connection with the equity investment, ACE also received options
     to purchase additional common stock in US Airways. On closing of the
     transaction, ACE sold these options for proceeds of $1.

b)   The Directors' and Officers' Trust represented restricted funds placed in
     trust for the use of the Directors and Officers of the Corporation under
     certain circumstances. The Trust was terminated during the year and the
     Corporation has repatriated these funds.

<PAGE>


7.   Long-Term Debt and Capital Lease Obligations

<TABLE>
<CAPTION>


                                                               Stated
                                                            Interest Rate
                                                           Final        at December 31,
                                                          Maturity          2005 (%)          2005              2004
<S>                                                         <C>            <C>               <C>               <C>
ACE Convertible Senior Notes due 2035 (a)                   2035            4.25              $247              $  -

ACE - GE Exit Financing (b)                                 2011              -                  -               540

Air Canada - Embraer Aircraft Financing (c)                2017-2020       7.71-7.85           393                 -

Air Canada - Conditional sales agreements (d)               2019            7.26               198               216

Air Canada - Lufthansa Cooperation Agreement (e)            2009            6.495               59                76

Air Canada - GE Loan (f)                                    2015            10.42               51                55

Air Canada Revolving Credit Facility (g)                    2007              -                  -                 -

Air Canada - GE Limited Recourse Loan (h)                   2014              -                  -                30

Air Canada - Amex Financing (i)                             2006              -                  -                43

Aeroplan Term Credit Facility (j)                           2009              -                300                 -

Aeroplan Revolving Term Credit Facility (j)                 2008              -                  -                 -

Other                                                      2009-2010       3.00-12.02           17                16
                                                                                        -------------------------------
                                                                                             1,265               976

Air Canada - Debt consolidated under AcG 15 - Aircraft leases (k)                            1,125                 -
Air Canada - Debt consolidated under AcG-15 - Fuel Facilities Corporations (l)                  53                 -
Air Canada - Capital lease obligations (m)                                                   1,365             1,570
                                                                                       -------------------------------
                                                                                             3,808             2,546

Current portion                                                                               (265)             (218)
                                                                                       -------------------------------

Long-term debt and capital lease obligatio            ns                                   $ 3,543           $ 2,328
                                                                                       -------------------------------


</TABLE>


Principal repayment requirements as at December 31, 2005 on long-term debt,
capital lease obligations, and aircraft, engine and fuel facility debt
consolidated as variable interest entities under AcG-15 are as follows:


<PAGE>


<TABLE>
<CAPTION>

                                              2006        2007          2008           2009       2010
                                      -----------------------------------------------------------------

<S>                                       <C>           <C>           <C>            <C>        <C>
Long-term debt                            $    48       $  50         $  70          $ 349      $  35

Debt consolidated under AcG-15                 76         119           117             59        118

Capital lease principal obligation            141         174           172             84         82
                                      -----------------------------------------------------------------

Total                                     $   265       $ 343         $ 359          $ 492      $ 235
                                      -----------------------------------------------------------------
</TABLE>


a)   During the second quarter, 2005 ACE issued $330 of Convertible Senior
     Notes due 2035 ("Convertible Notes") for net proceeds of $319. For
     accounting purposes, the Convertible Notes are presented as a compound
     instrument. At the date of issuance, the value ascribed to the holders'
     conversion option, which is presented as equity, was $94 less allocated
     fees of $2; the value ascribed to the financial liability was $236. The
     financial liability was calculated by discounting the stream of future
     payments of interest and principal at the prevailing rate for a similar
     liability that does not have an associated conversion feature. The
     financial liability will increase to the face value of the debt over a
     five year period to June 1, 2010, the first date on which the holder can
     require ACE to purchase all or a portion of the Convertible Notes, as
     described further below, resulting in an effective interest rate of 12%
     on the financial liability.

     The Convertible Notes bear interest at a rate of 4.25% per annum payable
     semi-annually in arrears on June 1 and December 1 in each year commencing
     December 1, 2005. Holders may convert their Convertible Notes into Class B
     Voting Shares (if the holder is Canadian) or into Class A Variable Voting
     Shares (if the holder is not a Canadian) prior to maturity based on an
     initial conversion rate of 20.8333 Shares per $1,000.00 principal amount
     of Convertible Notes. Upon notice of conversion, ACE will have the option
     to deliver cash, Shares or a combination of cash and Shares for the
     Convertible Notes surrendered.

     At any time on or after June 6, 2008, ACE may redeem all or a portion of
     the Convertible Notes at a redemption price equal to 100% of the principal
     amount of the Convertible Notes, plus accrued interest. Holders may
     require ACE to purchase all or a portion of the Convertible Notes on June
     1, 2010; June 1, 2015; June 1, 2020; June 1, 2025 and June 1, 2030 at a
     purchase price equal to 100% of the principal amount of the Notes to be
     purchased, plus accrued and unpaid interest. Upon specified change of
     control events, holders of Convertible Notes will have the option to
     require ACE to purchase all or any portion of the Convertible Notes at a
     price equal to 100% of the principal amount of the Convertible Notes to be
     purchased, plus accrued and unpaid interest.

     ACE may, at its option and subject to certain conditions, elect to satisfy
     its obligation to repay all or any portion of the principal amount of the
     Convertible Notes that are to be redeemed, purchased or that are to be
     repaid at maturity, by issuing and delivering Class A Variable Voting
     Shares (if the holder is not a Canadian) and Class B Voting Shares (if the
     holder is Canadian). The number of Shares a holder will receive in respect
     of each Convertible Note will be determined by dividing the principal
     amount of the Convertible Notes that are to be redeemed, purchased or
     repaid at maturity, as the case may be, and that are not paid in cash, by
     95% of the average Closing Price (defined as the weighted average, by
     volume, of the reported last sale price of each class of Shares) of the
     Shares on the Toronto Stock Exchange ("TSX") for the ten consecutive
     trading days ending on the third trading day preceding the date fixed for
     redemption, purchase or maturity date, as the case may be.

<PAGE>



b)   Non-revolving term loan in the amount of US$425 or CDN equivalent, which
     bore interest at a BA rate plus a margin. The loan was drawn in Canadian
     dollars as at September 30, 2004 in the amount of $540. The margin was
     set at 4.25% at March 31, 2005. The loan was secured by a first priority
     security interest on all of the existing and after acquired property of
     the Corporation, other than leased assets, assets financed by other
     parties, and certain other excluded property of the Corporation. The loan
     was repaid in full prior to maturity on April 6, 2005, including an early
     payment fee of $16. The Corporation recorded a charge for $29 in other
     non-operating expenses for this transaction, including $13 for the
     write-off of deferred financing charges.

c)   Air Canada completed loan agreements with third parties in 2005 for
     Embraer aircraft totalling US$337. The loans, secured by the Embraer
     aircraft, are to be repaid in quarterly installments and mature between
     2017 and 2020. The majority of the borrowings bear interest at a fixed
     interest rate and the remainder bears interest at a floating interest rate
     equal to the three month US LIBOR plus 3.25%.

d)   Purchases of two A340-500 aircraft financed through conditional sales
     agreements for an initial value of US$174. Principal and interest is paid
     quarterly until maturity in 2019. The purchase price instalments bear
     interest at a three month LIBOR rate plus 2.9% (7.26% as at December 31,
     2005).

e)   US$50 borrowing maturing in 2009, with semi annual repayments, at a fixed
     interest rate of 4.495% plus an annual 2.0% guarantee fee.

f)   US$43 borrowing maturing in 2015, with quarterly repayments, at a
     floating interest rate equal to the six month LIBOR rate plus 5.75%
     pre-payable on any interest payment date after December 23, 2007 secured
     by certain flight training equipment with a current carrying value of
     $63.

g)   On April 6, 2005, Air Canada entered into a senior secured syndicated
     revolving credit facility ("the Credit Facility") in an aggregate amount
     of up to $300 or the US dollar equivalent. The Credit Facility has a
     two-year term which can be extended at Air Canada's option for additional
     one-year periods on each anniversary of closing, subject to prior
     approval by a majority of the lenders. Included in the aggregate amount
     is a swing line facility of up to $20 provided for cash management and
     working capital purposes. Until April 2006, the margin under the credit
     facility is LIBOR plus 3% or prime plus 2%. After that date, the margin
     fluctuates based on Air Canada's EBITDAR coverage ratio with rates
     ranging from LIBOR plus 2.5% to 3.5% or prime plus 1.5% to 2.5%. The
     amount available to be drawn by Air Canada under the Credit Facility is
     limited to the lesser of $300 and the amount of a borrowing base
     determined with reference to certain eligible accounts receivable of Air
     Canada and certain eligible owned and leased real property of Air Canada.
     As at December 31, 2005, no amount was drawn under this facility. The
     Credit Facility is secured principally by a first priority security
     interest and hypothec over the present and after-acquired property of Air
     Canada, subject to certain exclusions and permitted encumbrances.

h)   US$25 borrowing, which was secured by one B747-400 aircraft, maturing in
     2014 at an interest rate equal to the one month LIBOR rate plus a margin
     of 4.0% and was accrued in arrears at the end of each LIBOR period. Air
     Canada completed a sales agreement for the aircraft with a third party in
     January 2005. Consistent with the terms of the loan agreement, the
     proceeds were used to repay this borrowing. No gain or loss was recorded
     on this sale.

i)   The Amex Financing required monthly principal and interest payments over
     the term of the Canadian dollar loan which extended to January 5, 2006
     and was extendable in six month intervals by mutual consent. Under the
     terms of the agreement, cash principal payments under the facility were
     made as loyalty points were purchased and as amounts were due to Air
     Canada or Aeroplan under various Amex agreements. The facility was
     subject to interest at the Bank of Montreal's prime lending rate

<PAGE>


     and was secured by all accounts due to Amex under the agreements and all
     of the present and future licenses, trademarks and design marks owned by
     Air Canada and Aeroplan and used by Amex in connection with the
     agreement. This financing was repaid during the third quarter of 2005.

j)   Aeroplan LP has arranged for senior secured credit facilities in the
     amount of $475. The credit facilities consist of one $300 (or the U.S.
     dollar equivalent thereof) term facility (the "Term A Facility"), a $100
     (or the U.S. dollar equivalent thereof) acquisition facility (the "Term B
     Facility") and a $75 (or the U.S. dollar equivalent thereof) revolving
     term facility (the "Revolving Facility").

     The Term A Facility and the Term B Facility mature on June 29, 2009, or
     earlier at the option of Aeroplan and bears interest at rates ranging
     from Canadian prime rate and U.S. base rate to Canadian prime rate and
     U.S. base rate plus 0.75% and the Bankers' Acceptance rate and LIBOR plus
     1.0% to 1.75%. At December 31, 2005, borrowings under the Term A Facility
     were in the form of Bankers' Acceptances with a 91 day term and an
     effective interest rate of 4.4%. The Term A Facility was drawn on June
     29, 2005 in the amount of $300, in order to fund a portion of the $400
     Aeroplan Miles Redemption Reserve (refer to note 13), included in cash
     and cash equivalents and short-term investments. As at December 31, 2005,
     no amounts were drawn under the Term B Facility.

     The Revolving Facility matures on June 29, 2008, or earlier at the option
     of Aeroplan and bears interest at rates ranging from Canadian prime rate
     and U.S. base rate to Canadian prime rate and U.S. base rate plus 0.75%
     and the Bankers' Acceptance rate and LIBOR plus 1.0% to 1.75%. At
     December 31, 2005, no amounts were drawn under this facility.

     The senior secured credit facilities are secured by a first priority
     security interest and hypothec over the present and after-acquired
     personal property of Aeroplan LP, subject to certain exclusions and
     permitted liens. Aeroplan LP's obligations in respect of the senior
     secured credit facilities will also be guaranteed by each of Aeroplan
     LP's general partner (Aeroplan GP), a subsidiary of the Corporation, and
     the Aeroplan Trust, with the Trust providing a first priority security
     interest over its present and after-acquired personal property, subject
     to certain exclusions and permitted liens, as security for its guarantee
     obligations, and with Aeroplan GP providing a pledge of its interests in
     Aeroplan LP as security for its guarantee obligations. The Aeroplan Trust
     is wholly owned by the Aeroplan Income Fund and holds a 14.4% interest in
     Aeroplan LP. The terms of the New Credit Facilities include certain
     covenants. The credit facilities are subject to Aeroplan's ability to
     maintain certain leverage, debt service and interest coverage covenants,
     as well as other affirmative and negative covenants.

k)   Air Canada entered into aircraft and engine lease transactions with
     several special purpose entities that qualify as VIEs. As a result of the
     adoption of AcG-15 as described in note 2, Air Canada has consolidated
     leasing entities covering 51 aircraft and 22 engines previously accounted
     for as operating leases. The debt has a weighted average effective
     interest rate of approximately 8%. The aircraft are charged as collateral
     against the debt by the owners thereof. The creditors under these leasing
     arrangements have recourse to Air Canada, as lessee, in the event of
     default or early termination of the lease. The majority of the VIEs are
     not Canadian based entities and hold debt amounting to US$965 ($1,125).

<PAGE>

    Aircraft related debt consolidated under AcG-15 is summarized as follows:

                                            Final
                                          Maturity             2005

                 Canadair Regional Jet    2007-2011        $    329
                 Boeing 767-300           2011-2016             231
                 Engines                  2008                   78
                 Airbus A319              2011-2014             331
                 Airbus A321              2017                  156
                                                           --------
                                                           $  1,125


l)   Under AcG-15, Air Canada is the primary beneficiary of certain of the Fuel
     Facilities Corporations. As a result of the adoption of AcG-15 as
     described in note 2, Air Canada consolidated three Fuel Facilities
     Corporations. The debt is secured by a general security agreement covering
     all assets of the Fuel Facilities Corporations.

m)   Capital lease obligations, related to computer equipment, facilities and
     35 aircraft, total $1,365 ($87 and US$1,096). Future minimum lease
     payments are $1,989, which includes $624 of interest. The debt has a
     weighted average effective interest rate of approximately 8%. Final
     maturities range from 2008 to 2027. Certain aircraft lease agreements
     contain a fair value test, beginning on July 1, 2009, and annually
     thereafter until lease expiry. This test relates to 38 aircraft under
     lease of which 33 are accounted for as capital leases. Under the test,
     Air Canada may be required to prepay certain lease amounts, based on
     aircraft fair values, as of the date of the test. Any amounts prepaid are
     recoverable to the extent that aircraft fair values exceed certain
     thresholds and to the extent Air Canada has obtained residual value
     support on lease expiry. The maximum amount payable on July 1, 2009,
     assuming the related aircraft are worth nil, is US$871. This amount
     declines over time to nil upon lease expiry.

Interest paid on long-term debt and capital lease obligations in 2005 by the
Corporation was $220 (2004 - $38). During the nine months ended September 30,
2004, the Predecessor Company paid interest expense of $131.


<PAGE>



8.   Future Income Taxes

Significant components of the Corporation's future tax assets and liabilities
are as follows:

                                                               2005       2004
Future tax assets

Non-capital loss carry forward                             $    793    $   558
Post-employment obligations                                     748        775
Accounting provisions not currently deductible for tax          239        242
Tax basis of fixed assets over book basis                       400        396
Eligible capital expenditures                                    19         40
Unearned revenues                                                31        372
Intangible assets                                               111         81
Net other                                                        64         62
                                                         -----------------------
Total future tax assets                                       2,405      2,526
                                                         -----------------------
Future tax liabilities

Intangible assets                                               388        435
                                                         -----------------------
Net future tax assets                                         2,017      2,091
                                                         -----------------------

Less valuation allowance                                      2,238      2,334
                                                         -----------------------

Net recorded future income tax liability                   $   (221)   $  (243)
                                                         -----------------------

Future income tax assets are recognized to the extent that realization is
considered more likely than not. Since the Corporation has determined that it
is more likely than not that the future income tax assets are not recoverable,
the net future tax assets have been offset by a valuation allowance. However,
the future tax deductions underlying the future tax assets remain available for
use in the future to reduce taxable income. The benefit of future income tax
assets that existed at fresh start, and against which a valuation allowance is
recorded, will be recognized first to reduce to nil any remaining intangible
assets (on a pro-rata basis) that were recorded upon fresh start reporting with
any remaining amount as a credit to shareholders' equity. The benefit of future
income tax assets that arise after fresh start will be recognized in the income
statement.

It has been assumed that certain intangibles with a carrying value of
approximately $1,297, with no underlying tax cost, have indefinite lives and
accordingly, the associated future income tax liability of $221 is not expected
to reverse until the intangible assets are disposed of or become amortizable.

<PAGE>



The reconciliation of income tax attributable to continuing operations,
computed at the statutory tax rates, to income tax expense (recovery) is as
follows:

<TABLE>
<CAPTION>
                                                                                     |
                                                           Successor Company         |       Predecessor
                                                                                     |           Company
                                                       Year ended      Period ended  |        Nine months
                                                     December 31,      December 31,  |ended September 30,
                                                             2005              2004  |               2004
                                                -------------------------------------|--------------------
                                                                                     |
<S>                                                    <C>               <C>            <C>
Provision (recovery) based on combined federal                                       |
and provincial tax rates                               $       132       $    10     |  $     (304)
Non-taxable portion of capital gains                            (2)           (3)    |          (4)
Large corporations tax                                          15             2     |           7
Non-deductible expenses                                         25             3     |          14
Non-taxable dilution gain on Aeroplan LP                       (42)            -     |           -
Rate impact of the transfer of temporary                                             |
difference attributable to Aeroplan from Air                                         |
Canada to ACE                                                   17             -     |           -
Effect of tax rate changes on future income                                          |
taxes                                                            -             -     |          (1)
Effect of statutory tax rates substantially                                          |
enacted during the year                                        (38)            -     |           -
Other                                                            1             -     |          (1)
                                                -------------------------------------|--------------------
                                                                                     |
                                                               108            12     |        (289)
                                                                                     |
Valuation allowance                                             23             1     |          291
                                                -------------------------------------|--------------------
                                                                23             1     |          291
                                                                                     |
Provision for income taxes                             $       131       $    13     |  $        2
                                                -------------------------------------|--------------------
                                                                                     |

</TABLE>



Significant components of the provision for income taxes attributable to
continuing operations are as follows:

<TABLE>
<CAPTION>
                                                                                     |
                                                       Successor Company             |       Predecessor
                                                                                     |           Company
                                                     Year  ended      Period ended   | Nine months ended
                                                    December 31,      December 31,   |     September 30,
                                                            2005              2004   |              2004
                                              ---------------------------------------|--------------------
<S>                                                    <C>               <C>            <C>
Current tax expense                                    $        15       $     2     |  $        7
                                                                                     |
Future income tax expense (recovery                                                  |
relating to temporary differences                              131            10     |        (296)
                                                                                     |
Future income tax recovery from tax rate                                             |
changes                                                        (38)            -     |           -
                                                                                     |
                                                                                     |
Valuation allowance                                             23             1     |         291
                                              ---------------------------------------|--------------------
                                                                                     |
Provision for income taxes                             $       131       $    13     |  $        2
                                              ---------------------------------------|--------------------
                                                                                     |
</TABLE>


<PAGE>


Income taxes paid in 2005 by the Corporation were $23 (2004 - less than $1).
Income taxes paid in 2004 by the Predecessor Company were less than $1.

The balances of tax attributes as at December 31, 2005, namely the balances of
non capital loss carryforward, vary amongst different taxing jurisdictions. The
following are the Federal tax loss expiry dates:


Year of expiry    Tax losses
-------------------------------

     2009        $          11
     2010                   12
     2011                    -
     2012                    -
     2013                    -
     2014                1,439
     2015                  904
                ---------------
                 $       2,366
                ---------------


<PAGE>

9.   Pension and Other Benefit Liabilities

The Corporation maintains several defined benefit and defined contribution
plans providing pension, other retirement and post-employment benefits to its
employees.

The Corporation is the administrator and sponsoring employer of ten Domestic
Registered Plans ("Domestic Registered Plans") registered under the Pension
Benefits Standard Act, 1985 (Canada). The US plan, UK plan and Japan plan are
international plans covering employees in those countries. In addition, the
Corporation maintains a number of supplementary pension plans, which are not
registered. The defined benefit pension plans provide benefits upon retirement,
termination or death based on the member's years of service and final average
earnings for a specified period.

The other employee benefits consist of health, life and disability. These
benefits consist of both post-employment and post-retirement benefits. The
post-employment benefits relate to disability benefits available to eligible
active employees, while the post-retirement benefits are comprised of health
care and life insurance benefits available to eligible retired employees.

The measurement date used for financial reporting of the pension and other
benefit obligations was revised to November 30 from December 31. The most
recent actuarial valuation of the registered domestic pension plans was as of
January 1, 2005 and the solvency deficit was $1,416. The next funding valuation
will be as of January 1, 2006.


The accrued benefit liability is included in the balance sheet as follows:


                                      2005        2004

Pension benefits                  $  1,433     $  1,563
Other employee future benefits         942          875
                                -----------------------
                                     2,375        2,438
Current portion                       (221)         (94)
                                -----------------------
Pension and other benefit
liabilities                       $  2,154     $  2,344
                                =======================


The current portion of Pension benefits represents past service contributions
for the Domestic Registered Plans, scheduled to be paid during 2006 while the
current portion of Other employee future benefits is an estimate of the claims
to be incurred during 2006. The current portion is included in Accounts payable
and accrued liabilities.

<PAGE>


Pension and other employee future benefit obligations are adjusted to reflect
the net accrued benefit obligation based on management's best estimate
assumptions on a going forward basis. The liability recorded is as follows:

<TABLE>
<CAPTION>
                                                                                   |
                                                                                   |
                                                           Pension Benefits        |      Other Benefits
                                                -------------------------------------------------------------------------
                                                Successor   Successor   Predecessor  Successor   Successor   Predecessor
                                                Company      Company      Company     Company     Company      Company
                                                December     December    September   December     December    September
                                                31, 2005    31, 2004    30, 2004    31, 2005     31, 2004    30, 2004

Change in benefit obligation

<S>                                             <C>       <C>         <C>            <C>          <C>         <C>
Benefit obligation at beginning of period       $ 11,207  $   10,783  $    10,873    $    842     $    866    $    819
Current service cost                                 202          46          139          85           23          69
Interest cost                                        650         163          468          50           13          40
Employees' contributions                              80          24           67           -           -            -
Benefits paid                                       (592)       (133)        (387)        (63)         (18)        (53)
Actuarial (gain) loss                              1,419         331         (370)         31          (34)         (9)
Foreign exchange                                     (45)         (7)          (7)         (5)          (8)          -
                                                -------------------------------------------------------------------------
Benefit obligation at end of period               12,921      11,207       10,783         940          842         866
                                                -------------------------------------------------------------------------

Change in plan assets

Fair value of plan assets at beginning of
period                                             9,673       9,149        9,022          10           10          10
Actual return on plan assets                       1,016         533          301           1            1           -
Employer contributions                               284         106          151          54           17          45
Employees' contributions                              80          24           67           -           -            -
Benefits paid                                       (592)       (133)        (387)        (51)         (18)        (45)
Foreign exchange                                     (40)         (6)          (5)          -            -           -
                                                -------------------------------------------------------------------------
Fair value of plan assets at end of period        10,421       9,673        9,149          14           10          10
                                                -------------------------------------------------------------------------

Deficit at end of period                           2,500       1,534        1,634         926          832         856
Employer contributions after measurement date         (6)          -            -          (5)           -           -
Unrecognized past service cost                         -           -         (605)          -            -         (30)
Unrecognized net actuarial gain (loss)            (1,061)         29         (957)         21           43        (190)
                                                 ------------------------------------------------------------------------
Net benefit obligation                             1,433       1,563           72         942          875         636

Current portion                                      199          82            -          22           12          12

                                                 ------------------------------------------------------------------------
Pension and other benefits liability             $ 1,234   $   1,481    $      72    $    920     $    863    $    624
                                                 ========================================================================

Weighted average assumptions used to determine the accrued benefit liability

Discount rate                                        5.00%        5.75%       6.00%     4.50% - 5.75%  4.75%-5.75%  6.00%
Rate of compensation increase                        4.00%        4.00%       4.00%

</TABLE>


The deficit at the end of the period by plan is as follows:


                             December 31,     December 31,
                                2005              2004

Domestic Registered Plans   $  1,657           $   824
US, UK and Japan                  76                66
Supplementary plans              767               644
                           ----------------------------
                            $  2,500           $ 1,534
                           ============================


The deficit, on an accounting basis, at December 31, 2005 for pension benefits
was $2,500 compared to $1,534 at December 31, 2004. Actuarial losses on the
benefit obligation of $1.4 billion were partially offset by employer past
service contributions of $99 and actual returns on plan assets which were
greater than expected. Of the actuarial losses, $1.2 billion were due to the
change in discount rate from 5.75% to 5%, and the remainder due to the increase
in expected lives assumed in the mortality table and other factors.

<PAGE>


On August 9, 2004, the Government of Canada adopted the Air Canada Pension Plan
Solvency Deficiency Funding Regulations (the "Pension Regulations"). The
Pension Regulations allow Air Canada to fund the solvency deficiencies in its
Domestic Registered Plans as of January 1, 2004 over ten years, rather than the
five years required under the ordinary rules, and to pay down such deficiencies
by way of an agreed schedule of variable annual contributions rather than by
way of equal annual contributions as required under the ordinary rules. The
Pension Regulations came into force upon Air Canada's emergence from CCAA
protection on September 30, 2004, on which date the Company issued subordinated
secured promissory notes in an aggregate amount of approximately $347 in favor
of the pension plan trustee. Such notes will be reduced as the principal amount
of the solvency deficiencies is paid down, and will only be called on the
occurrence of certain specified events of default. The amount of secured
promissory notes outstanding as at December 31, 2005 is $329. The effect of the
issuance of the subordinated security promissory notes is included within the
fair value of the obligation for pension benefits as reflected in the
Corporation's balance sheet.

The cash payments with respect to the pension plans are estimated to be $389
for 2006 as follows:


Domestic Registered Plans         $ 337
US, UK and Japan                     12
Supplementary plans                  40
                            ------------
                                  $ 389
                            ------------

The Domestic Registered Plan assets consist of the following:


                           Percentage of plan assets
                     November 30,  December 31,    Target
                        2005           2004       Allocation

Equity securities       62.3%         64.8%         65.0%
Bonds and mortgages     32.1%         33.1%         35.0%
Real estate              0.1%          0.2%          0.0%
Short-term and           5.5%          1.9%          0.0%
Other
                   ---------------------------------------
Total                  100.0%        100.0%        100.0%
                   =======================================



For the Domestic Registered Plans, the investments conform to the Statement of
Investment Policy and Objectives of the Air Canada Pension Master Trust Fund.
The Audit, Finance and Risk Committee of the Board of Directors reviews and
confirms the policy annually. The investment return objective of the fund is to
achieve a total annualized rate of return that exceeds inflation by at least
3.75% over the long term.

In addition to the broad asset allocation, as summarized in the asset
allocation section above, the following policies apply to individual asset
classes:

o    Equity investments can include convertible securities, and are required
     to be diversified among industries and economic sectors. Foreign equities
     can comprise 27% to 33% of the total market value of the trust.
     Limitations are placed on the overall allocation to any individual
     security at both cost and market value. Derivatives are permitted to the
     extent they are not used for speculative purposes or to create leverage.
o    Fixed income investments are oriented toward risk averse, long term,
     investment grade securities rated "A" or higher. With the exception of
     Government of Canada securities or a province thereof, in which the plan
     may invest the entire fixed income allocation, fixed income investments
     are required to be diversified among individual securities and sectors.
     The target return is comprised of 50% of the total return of the Scotia
     Capital Universe Bond Index and 50% of the total return of the Scotia
     Capital Long Term Bond Index.

Similar investment policies are established for the other pension plans
sponsored by Air Canada.

Air Canada's expected long-term rate of return on assets assumption is selected
based on the facts and circumstances that exist as of the measurement date, and
the specific portfolio mix of plan assets. Management reviewed anticipated
future long-term performance of individual asset categories and considered the
asset allocation strategy adopted by the company, including the longer duration
in its bond portfolio in comparison to other pension plans. These factors are
used to determine the average rate of expected return on the funds invested to
provide for the pension plan benefits. While the review considers recent fund
performance and historical returns, the assumption is primarily a long-term,
prospective rate.

The Corporation has recorded net defined benefit pension and other employee
future benefits expense as follows:

<TABLE>
<CAPTION>
                                                                                       |
                                                                                       |
                                                     Pension Benefits                  |    Other Benefits
                                               --------------------------------------------------------------------------------
                                                Successor    Successor    Predecessor    Successor     Successor   Predecessor
                                                 Company      Company      Company       Company       Company      Company
                                               December 31, December 31, September 30, December 31,  December 31, September 30,
                                                   2005         2004          2004          2005          2004         2004

Components of Net Periodic Pension Cost

<S>                                           <C>           <C>          <C>            <C>              <C>         <C>
Current service cost                          $    202      $     46     $    139       $    85          $   23    $   69
Interest cost                                      650           163          468            50              13        40
Actual return on plan assets                      (973)         (533)        (301)           (1)             (1)        -
Actuarial loss (gain) on benefit obligation      1,362           331         (370)           19             (34)       (9)
                                              ----------------------------------------------------------------------------------
Costs arising in the period                      1,241             7          (64)          153               1       100
Differences between costs arising in the period
 and costs recognized in the period in respect of:
   Return on plan assets                           281           360         (186)            -               -         -
   Actuarial loss (gain)                        (1,362)         (331)         390           (23)             34        20
   Plan amendments/prior service cost                -             -           67             -               -         5
   Transitional obligation (asset)                   -             -           (6)            -               -         -
                                              ----------------------------------------------------------------------------------
                                                (1,081)           29          265           (23)             34        25
Negative balances due to limit                       -             -            4             -               -         -
                                              ----------------------------------------------------------------------------------
Net periodic pension cost recognized          $    160      $     36     $    205      $    130          $   35    $  125
                                              ----------------------------------------------------------------------------------

Weighted average assumptions used to determine pension costs

Discount rate                                     5.75%         6.00%        6.00%    4.5%-5.75%       4.75%-5.75%     6.00%
Expected long term rate of return on
plan assets                                       7.50%         7.50%        7.50%         7.50%             7.50%     7.50%
Rate of compensation increase                     4.00%         4.00%        4.00%

</TABLE>


Defined Contribution Plan

The Corporation's management, administrative and certain unionized employees
may participate in a defined contribution plan. The employee's contributions
range from 3% to 6% of earnings with the Corporation contributing an equal
amount. The expense for the defined contribution plan recorded by the
Corporation is $6 (2004 $1). The expense for the defined contribution plan
recorded by the Predecessor Company was $3 in 2004.

Other Benefits - Sensitivity Analysis

Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A 10% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 2005 (2004 10.75%).
The rate is assumed to decrease gradually to 5% by 2013. A one percentage

<PAGE>


point increase in assumed health care trend rates would have increased the
service and interest costs by $1 and the obligation by $15. A one percentage
point decrease in assumed health care trend rates would have decreased the
service and interest costs by $1 and the obligation by $20.

<PAGE>


10.  Other Long-term Liabilities

                                                               2005      2004

Aeroplan deferred revenues (a)                             $    953    $  977

Unfavourable contract liability on aircraft leases (b)          107       290

Long-term employee liabilities (c)                              109       130

Aircraft rent in excess of lease payments                       126        33

Other                                                           104        90
                                                       -----------------------
Other long-term liabilities                               $   1,399   $ 1,520
                                                       -----------------------


a) The current portion of Aeroplan deferred revenues of $680 (2004 $622) are
reported in Aeroplan deferred revenues.

b) The unfavourable contract liability on aircraft leases represents the net
present value of lease payments in excess of estimated market rents related to
lease arrangements that existed on fresh start reporting. The liability was
decreased by $155 as a result of the adoption of AcG-15 as described in note 2.

c) The following table outlines the changes to the labour related provisions
which include those related to restructuring:


                                 Successor Company          Predecessor Company
                            Year ended     Period ended      Nine months ended
                      December 31, 2005   December 31, 2004  September 30, 2004
                      ----------------------------------------------------------

Beginning of period      $    192            $   198          $     121

Charges recorded               10                  2                117

Amounts disbursed             (45)                (8)               (40)

                     -----------------------------------------------------------
End of period            $    157            $   192          $     198

Current portion                48                 62                 68

                     -----------------------------------------------------------
Long-term employee
liabilities              $    109            $   130          $     130
                     -----------------------------------------------------------

The current portion is included in Accounts payable and accrued liabilities. An
involuntary severance program pertaining to the Predecessor and Corporation's
workforce reduction plan with respect to non-unionized employees was approved
by Management in 2003. Implementation of the plan began in May 2003 and is
expected to continue into 2006.

<PAGE>


Implementation of the workforce reduction plan pertaining to the Predecessor
Company's unionized employees commenced in the second quarter of 2003 as a
result of agreed modifications to all collective agreements between employee
unions and the Company. Further agreed modifications to all collective
agreements were reached in July 2004. The modifications to certain collective
agreements include voluntary severance programs ("VSP"). For those VSP which
will be offered to the members of the affected employee unions over the next
several years, the estimated cost of the VSP is approximately $47 and will be
recorded as a liability and a salary and wage expense as the affected employees
accept the offer.


<PAGE>


11.  Stock Based Compensation

ACE maintains a stock option plan for certain employees. Plan participation is
limited to employees holding positions that, in ACE Board's view (or a
committee selected by the Board), have a significant impact on ACE's long-term
results. During 2005, the plan was amended to increase the number of shares
that are available for issuance to reflect the greater number of shares
outstanding as a result of the new issue of shares and convertible debt in the
second quarter. The number of shares available for issuance under this plan has
increased from 5,052,545 (approximately 5% of the fully diluted equity of ACE
at the time the plan was adopted) to a maximum of 6,078,882 shares
(approximately 5% of the fully diluted equity of ACE as at December 31, 2005).
The stock option plan provides that the options will have an exercise price of
not less than 100% of the market price of the underlying shares at the time of
grant.

During 2005, ACE granted options to purchase 770,000 (period ended December 31,
2004: 3,027,509 options granted) shares with a weighted average exercise price
of $39.44 (2004 - $20.00) per common share. The fair value of stock options
granted is recognized as a charge to salary and wage expense over the
applicable vesting period, with an offset to contributed surplus. Fifty percent
of all options vest over four years. The remaining options will vest based upon
performance conditions over the same time period. All options expire after
seven years. When options are exercised, the consideration paid by employees,
together with the amount in contributed surplus, is credited to share capital.

The assumptions used to determine stock-based compensation expense, using the
Black-Scholes option valuation model were as follows:

                                                       2005            2004

Compensation expense ($ millions)                  $      6      $          1

Number of stock options granted                     770,000         3,027,509

Weighted average fair value per option
granted ($)                                        $   9.46      $       7.73

Aggregated fair value of options granted
($ millions)                                       $      7      $         23

Weighted average assumptions:
   Risk-free interest rate                            3.40%             3.90%
   Expected volatility                                  35%               52%
   Dividend yield                                        0%                0%
   Expected option life (years)                         4.5               4.5


In 2005, ACE issued 521,976 common shares on the exercise of stock options for
cash consideration of $10.

In 2005, the amount credited to share capital for stock-based compensation was
$11. The amount credited to contributed surplus was $5.

At December 31, 2005, a total of 3,186,908 (2004 - 3,027,509) stock options
were outstanding, and represented approximately 2.61% (2004 2.99%) of ACE's
fully diluted equity, which was within the Corporation's guideline of 5%.

<PAGE>

A summary of the Corporation's stock option plan and activity is as follows:

<TABLE>
<CAPTION>


                                              2005                           2004
                                 ------------------------------   --------------------------------
                                               Weighted Average                  Weighted Average
                                                   Exercise                           Exercise
                                   Shares (000)  Price/Share      Shares (000)     Price/Share
                                  ----------------------------------------------------------------

Common Shares
<S>                                     <C>          <C>              <C>             <C>
Beginning of period                     3,028        $20.00                 -           $    -
Granted                                   770         39.44             3,028            20.00
Exercised                                (522)        20.00                 -                -
Forfeited                                 (89)        20.00                 -                -
                                 -----------------------------------------------------------------
Outstanding options, end of year        3,187        $24.70             3,028           $20.00
                                  -------------------------- -------------------------------------
Options exercisable, end of year          162        $23.95                 -           $20.00
</TABLE>



<TABLE>
<CAPTION>
                                                                                  |
                                                                                  |
                                   2005 Outstanding Options                       |  2005 Exercisable Options
                                --------------------------------------------------|-------------------------------
                                  Number of    Weighted Average                   |Number of
     Range of                      Options       Remaining       Weighted Average |Exercisable   Weighted Average
 Exercise Prices   Expiry Dates  Outstanding    Life (Years)         Exercise     | Options         Exercise
                                                                  Price/Share     |               Price/Share
                                                                                  |
<S>   <C>              <C>         <C>               <C>             <C>              <C>           <C>
      $20.00           2011        2,416,908         6               $20.00       |    129,923       $20.00
 $34.11 - $41.62       2012          770,000         7               $39.44       |     32,292       $39.87
                                -------------                  -------------------|-------------------------------
                                   3,186,908                         $24.70       |    162,215       $23.95
                                =============                  ===================|===============================
                                                                                  |
</TABLE>


Predecessor Company

In the Predecessor Company's stock option plan, eligible employees were granted
options to purchase common shares and Class A shares, at a price not less than
the market value of the shares at the date of granting. All outstanding options
of the Predecessor Company were cancelled in 2004 without payment or
consideration (7,300,000 common shares with a weighted average exercise price
of $9.05 and 2,316,000 Class A shares with a weighted average exercise price of
$6.54).


<PAGE>


12.  Share Capital and Other Equity

The issued and outstanding common shares of ACE as at December 31, 2005, along
with potential common shares, are as follows:

<TABLE>
<CAPTION>

                                                                                2005            2004
                                                      Authorized            Outstanding (000)
                                                   --------------------------------------------------
Issued and outstanding common shares
<S>                                                   <C>                     <C>             <C>
        Class A variable voting shares (a)            unlimited               76,735          74,813
        Class B voting shares (b)                     unlimited               25,059           8,813
        Shares held in escrow  (Note 19)                                          28           5,189
                                                                    ---------------------------------

Total issued and outstanding common shares                                   101,822          88,815
                                                                    ---------------------------------

Potential common shares
        Convertible preferred shares (c)                                      10,228           9,375
        Convertible notes (d)                                                  6,875               -
        Stock options                                                          3,187           3,028
                                                                    ---------------------------------
                                                                               20,290          12,403
                                                                    ---------------------------------
</TABLE>



Share capital and other equity is comprised of:

a)   Class A Variable Voting Shares

The Class A Variable Voting Shares may be held only by persons who are not
Canadians and are entitled to one vote per Class A Variable Voting Share unless
(i) the number of Class A Variable Voting Shares outstanding (including the
Convertible Preferred Shares, on an as-converted basis), as a percentage of the
total number of votes attaching to voting shares outstanding exceeds 25% or
(ii) the total number of votes cast by or on behalf of holders of Class A
Variable Voting Shares (including the Convertible Preferred Shares on an
as-converted basis) at any meeting exceeds 25% of the total number of votes
that may be cast at such meeting. If either of the above noted thresholds would
otherwise be surpassed at any time, the vote attached to each Class A Variable
Voting Share will decrease proportionately such that (i) the Class A Variable
Voting Shares as a class (including the Convertible Preferred Shares on an
as-converted basis) do not carry more than 25% of the aggregate votes attached
to all issued and outstanding voting shares of ACE and (ii) the total number of
votes cast by or on behalf of holders of Class A Variable Voting Shares
(including the Convertible Preferred Shares on an as-converted basis) at any
meeting do not exceed 25% of the votes that may be cast at such meeting.

b)   Class B Voting Shares

The Class B Voting Shares may be held only by persons who are Canadians. Each
Class B Voting Share shall confer the right to one (1) vote in person or by
proxy at all meetings of shareholders of the ACE.

<PAGE>


c)   Convertible Preferred Shares

As at September 30, 2004, 12,500 Convertible Preferred Shares were issued to an
affiliate of Cerberus for consideration of $250 before fees of $12. These
Convertible Preferred Shares are convertible into 10,228,441 common shares,
based on the conversion ratio applicable as at December 31, 2005.

For accounting purposes, the Convertible Preferred Shares are presented as a
compound instrument. At the date of issuance, the value ascribed to the
holders' conversion option, which is presented as equity, was $123 less
allocated fees of $6; the value ascribed to the financial liability was $127.
The Convertible Preferred Shares will increase by 5% per annum, compounded
semi-annually from the date of issuance ("Fully Accreted Value") resulting in
an accretion on the financial liability at effective interest rate of 12%.

Each preferred share shall confer on its holder the right to that number of
votes as is equal to the number of ACE shares into which each preferred share
held by such holder could be converted on the date for determination of
shareholders entitled to vote at the meeting or on the date of any written
consent, based on the conversion ratio in effect on such date; provided,
however, that if any Convertible Preferred Shares are held by persons who are
not Canadians, such Convertible Preferred Shares shall be subject to the same
proportionate reduction in voting percentage as described for Class A Variable
Voting Shares above as if, for voting purposes only, such Convertible Preferred
Shares had been converted into Class A Variable Voting Shares.

The Convertible Preferred Shares may be converted at any time, at the option of
the holder thereof, into fully paid and non-assessable Class B Voting Shares
(if the holder is a Canadian) or fully paid and non-assessable Class A Variable
Voting Shares (if the holder is not a Canadian) at the conversion ratio
applicable upon the date of conversion. The conversion price is initially equal
to 135% of the subscription price of each Class B Voting Share under the Rights
Offering. The conversion price was adjusted automatically downward on the first
anniversary of the issuance date of the Convertible Preferred Shares to 130% of
the subscription price of each ACE Class B Voting Share. The conversion is
based upon the Fully Accreted Value at the time of conversion.

Mandatory Conversion

The holders of ACE Convertible Preferred Shares would have been required to
convert the ACE Convertible Preferred Shares into fully paid and non-assessable
common shares at the conversion ratio applicable upon the date of conversion,
if at any time during the period between the effective date until and including
the first anniversary thereof, the closing price of the ACE shares on the
principal market for each of thirty consecutive trading days exceeded 200% of
the then applicable conversion price.

Following the first anniversary of the effective date, the holders of ACE
Convertible Preferred Shares will be required to convert the ACE Convertible
Preferred Shares into fully paid and non-assessable common shares at the
conversion ratio applicable upon the date of conversion, if the closing price
of the ACE shares on the principal market for each of thirty consecutive
trading days exceeded 175% of the then applicable conversion price.

The Convertible Preferred Shares will also be subject to mandatory conversion
into fully paid and non-assessable common shares within ten days of each
mandatory conversion date, at the conversion ratio applicable upon the date of
conversion, upon the following terms and conditions:
o    if the closing price of the ACE shares on the principal market exceeds
     the Fully Accreted Value of a preferred share on at least thirty of the
     one hundred trading days immediately prior to a particular mandatory
     conversion date; or

<PAGE>


o    if the closing price of the ACE shares on the principal market does not
     exceed the Fully Accreted Value of a preferred share on at least thirty
     of the one hundred trading days immediately prior to a particular
     mandatory conversion date, (i) the holders of the Convertible Preferred
     Shares will not be required to convert their Convertible Preferred Shares
     into ACE shares and (ii) as of such mandatory conversion date, the then
     applicable conversion price shall be automatically reduced by 3.75%; and
o    if the closing price of the ACE shares on the principal market does not
     exceed the Fully Accreted Value of a preferred share on at least thirty
     of the one hundred trading days immediately prior to the final maturity
     date, then holders of Convertible Preferred Shares will be entitled, upon
     written notice to ACE given within ten days following the final maturity
     date, to require ACE to redeem each of the Convertible Preferred Shares
     in cash at a redemption price equal to the Fully Accreted Value as of the
     final maturity date.

The first mandatory conversion date is seven years from the date of issuance.

The Convertible Preferred Shares (including the shares into which they are
convertible) may not be sold, assigned or in any way transferred by Cerberus
(other than to its affiliates) including pursuant to hedging transactions,
swaps or other arrangements transferring any of the economic consequences of
the ownership of the Convertible Preferred Shares acquired by Cerberus for a
period of 24 months after the closing; provided that, if at any time during
such 24 month period Cerberus is required to convert the Convertible Preferred
Shares, then the restrictions on transfer with respect to 50% of the
Convertible Preferred Shares (and any shares into which they are converted or
convertible) shall be of no force and effect and the restrictions on transfer
with respect to the remaining 50% of the Convertible Preferred Shares (and any
shares into which they are converted or convertible) shall be limited only to
sales of beneficial ownership of the Convertible Preferred Shares (and any
shares into which they are convertible) to third parties. Notwithstanding the
foregoing, the transfer restrictions shall cease to be in effect as to all
Convertible Preferred Shares (and any shares into which they are convertible)
in the event of a tender offer for any of the shares of ACE, any change in
control transaction, any liquidation, dissolution, bankruptcy or other similar
proceedings of ACE.

Subject to the rights, privileges, restrictions and conditions attaching to the
shares of ACE ranking prior to the Convertible Preferred Shares, upon the
liquidation, dissolution or winding-up or distribution of the assets of ACE,
the holders of the Convertible Preferred Shares will be entitled to receive,
prior to and in preference to the holders of ACE shares, an amount equal to the
Fully Accreted Value of the Convertible Preferred Shares as of the date of the
liquidation, dissolution, winding-up or distribution.

The holders of Convertible Preferred Shares participate on an as-converted
basis with respect to all dividends, distributions, spin-off, split-off,
subscription rights or other offers made to holders of Class A Variable Voting
Shares and Class B Voting Shares and any other similar transactions.

d)   Convertible Notes

During 2005, the Corporation issued $330 of Convertible Senior Notes due 2035
("Convertible Notes") for net proceeds of $319. For accounting purposes, the
Convertible Notes are presented as a compound instrument with the conversion
option reflected in other equity above. Refer to note 7a for additional
information.

<PAGE>


Share capital and other equity summary as at December 31, 2005 (net of issue
costs)

                                                         2005           2004

Common shares (e)                                     $ 2,231       $   1,778
Convertible preferred shares (c)                          117             117
Convertible notes (d)                                      92               -
                                              -------------------------------
                                                        2,440           1,895
Adjustment to shareholders' equity (f)                 (1,693)         (1,708)
                                              -------------------------------
Share capital and other equity                        $   747       $     187
                                              -------------------------------


e) The carrying value of outstanding common shares as at December 31, 2004
includes the net proceeds received under the Rights Offering and Standby
Purchase Agreement of $852 and the fair value of common shares issued to
creditors under the Plan of $925 based upon the issue price from the Rights
Offering. Issue of common shares during the period ended December 31, 2004 was
$1. In 2005, ACE completed the public offering of an aggregate of 12,485,000
Class A Variable Voting Shares and Class B Voting Shares at a price of $37.00
per share for gross proceeds of approximately $462 ($442 net of fees). During
2005, the Company issued 521,976 common shares on the exercise of stock options
for cash consideration of $10.

f) Under fresh start reporting, the balance in shareholders' equity after a
comprehensive revaluation is adjusted to the net value of identifiable assets
and liabilities. CICA 1625 - Comprehensive Revaluation of Assets and
Liabilities, does not permit goodwill to be recorded even if the fair value of
net assets is less than the fair value of the enterprise as a whole. During the
year ended December 31, 2005, an adjustment of $15 was recorded in
shareholders' equity related to fresh start reporting. Management has assessed
this adjustment as not material to the financial statements, as a whole, for
the periods presented or for prior periods that have been previously reported.

The changes during 2005 in the outstanding number of common shares and their
aggregate stated value were as follows:

                                                               2005
                                               ---------------------------------
                                                Number (000)        Amount

Issued, beginning of year                         88,815          $  1,778
Shares issued under equity offering               12,485               442
Shares issued under option                           522                11
                                               --------------------------------
Issued, end of year                              101,822          $  2,231
                                               --------------------------------



<PAGE>

13.  Aeroplan

Disposal of interests in Aeroplan

On June 29, 2005, Aeroplan Limited Partnership ("the Predecessor LP")
transferred substantially all of its assets and liabilities into a newly
created Aeroplan Limited Partnership ("Aeroplan LP") in exchange for the
issuance of 175 million units of Aeroplan LP and the issuance of two promissory
notes (the Acquisition Promissory Note in the amount of $125 and the Working
Capital Note in the amount of $186). The Predecessor LP was liquidated into ACE
at closing. The Acquisition Promissory Note was settled on June 29, 2005 from
the proceeds of the offering. The Working Capital Note which was due October
31, 2005, was repaid during the third quarter. These transactions and events
did not have any accounting consequences on the consolidated financial
statements.

On June 29, 2005, the Aeroplan Income Fund ("the Fund") sold 25 million units
at a price of $10.00 per unit for net proceeds of $232. On June 30, 2005 the
underwriters exercised in full their over-allotment option to purchase an
additional 3.75 million units at a price of $10.00 per unit for proceeds of
$38. With the proceeds from the over-allotment option, the Fund purchased 3.75
million units from ACE at a cost of $38, reducing the number of units held by
ACE to 171.25 million. Costs of $3 incurred in connection with the exercise of
the over-allotment option were borne by ACE. The Fund is an unincorporated,
open-ended trust established under the laws of the Province of Ontario, created
to indirectly acquire and hold an interest in the outstanding units of Aeroplan
LP. The Fund, through the Aeroplan Trust, holds 14.4% of the outstanding
limited partnership units of Aeroplan LP, and ACE holds the remaining 85.6% of
the outstanding limited partnership units of Aeroplan LP.

Pursuant to the limited partnership agreement, 20% of Aeroplan units are
subordinated until December 31, 2006, representing 40 million units held by ACE
in favour of the Fund. Distributions on the subordinated units will only be
paid by Aeroplan following the end of a fiscal quarter to the extent that
Aeroplan has met and paid its distributable cash target to the Fund as the
holder of non-subordinated units.

Under the terms of an investor liquidity agreement dated June 29, 2005, the
non-subordinated units held by ACE in Aeroplan are exchangeable for Fund units
on a one-to-one basis. The Fund has reserved 171.25 million units for the
exercise of the exchange right. The subordinated units of Aeroplan held by ACE
will become exchangeable after December 31, 2006. The exchange right expires
once all units of Aeroplan held by ACE have been exchanged. In addition, ACE
also has liquidity rights, which require the Trust, on a best efforts basis, to
purchase a number of non-subordinated (exchangeable) Aeroplan units for a cash
payment equal to the net proceeds of an offering of an equivalent number of
units of the Fund. The investor liquidity agreement also provides for
registration and piggy-back rights subject to certain restrictions.

ACE has recorded a dilution gain of $190 as a result of the dilution of its
interests in Aeroplan LP. The dilution gain is the net proceeds of the offering
in excess of ACE's proportionate carrying value of its investment in Aeroplan
LP, including fair value adjustments recorded on consolidation. In addition, a
future income tax expense of $28 was recorded.

 Cash reserves of Aeroplan

In conjunction with the issuance of Units to the Aeroplan Income Fund and the
bank financing (refer to note 7j) entered into on June 29, 2005, Aeroplan LP
established the Aeroplan Miles Redemption reserve ("the Reserve"). As at
December 31, 2005, the Reserve was $400 of which $301 is included in cash and
cash equivalents and $99 is included in short-term investments. The amount to
be held in the Reserve, as

<PAGE>



well as the types of securities it may be invested in, are based on policies
established by management of Aeroplan LP, which will be reviewed periodically.
The Reserve may be used to supplement cash flows generated from operations in
order to pay for rewards during unusually high redemption activity associated
with Aeroplan Miles. Under the terms of the term facility, described in note
7j, Aeroplan LP was required to deposit the borrowed funds of $300 into the
Reserve. Any deposits of funds in non-Canadian dollar denominated investments
have to be hedged.

<PAGE>


14.  Earnings Per Share


The following table outlines the calculation of basic and diluted earnings per
share (in millions, except per share amounts):

<TABLE>
<CAPTION>

                                                                    Successor Company              Predecessor Company
                                                           Year ended          Period ended        Nine months ended
                                                          December 31           December 31             September 30
                                                                 2005                  2004                     2004
                                                     -------------------------------------------------------------
Numerator:
     Numerator for basic earnings per share:
<S>                                                      <C>                 <C>                      <C>
        Income (loss) from continuing operations         $     258           $      15                $     (895)
     Effect of potential dilutive securities:
        After tax income from:
          Convertible preferred shares                          11                   3                         -
          Convertible notes                                     15                   -                         -
          Convertible subordinated debentures                    -                   -                         8
     Add back anti-dilutive impact                             (15)                 (3)                       (8)
                                                     -------------------------------------------------------------
Adjusted earnings (loss) for diluted earnings per        $     269           $      15                $     (895)
share
                                                     =============================================================
Denominator:
     Denominator for basic earnings per share:
        Weighted-average shares                                 98                  89                       120
                                                     -------------------------------------------------------------
        Effect of potential dilutive securities:
          Stock options                                          1                   1                         -
          Convertible preferred shares                          10                   9                         -
          Convertible notes                                      5                   -                         -
          Class A non-voting preferred shares                    -                   -                        10
          Convertible subordinated debentures                    -                   -                         9
                                                     -------------------------------------------------------------
                                                                16                  10                        19
        Add back anti-dilutive impact                           (5)                 (9)                      (19)
                                                     -------------------------------------------------------------
Denominator for diluted earnings per share:
     Adjusted weighted-average shares                          109                  90                       120
                                                     -------------------------------------------------------------
Basic earnings (loss) per share:                        $     2.63          $     0.17                $    (7.45)
                                                     =============================================================

                                                     -------------------------------------------------------------
Diluted earnings (loss) per share:                      $     2.46          $     0.17                $    (7.45)
                                                     =============================================================

</TABLE>


The calculation of earnings per share is based on whole dollars and not on
rounded millions. As a result, the above amounts may not be recalculated to the
per share amount disclosed above.

Pursuant to the Plan as further described in note 19, all issued and
outstanding options of Air Canada and warrants were cancelled without payment
or consideration. In addition a new share capital was established under ACE, as
further described in note 12.

The dilutive effect of outstanding stock options on earnings per share is based
on the application of the treasury stock method. For the Corporation, under the
treasury stock method, the proceeds from the exercise of such securities are
assumed to be used to purchase Class B Voting Shares. For the Predecessor
Company, proceeds were assumed to be used to purchase common shares and Class A
shares.

Excluded from the calculation of diluted earnings per share were 750,000
outstanding options as the options' exercise price was greater than the average
market price of the common shares for the year.

<PAGE>


15.  Segment Information

As outlined in note 1, the Corporation has four reportable segments:
Transportation Services, Aeroplan, Jazz, and ACTS. In the Predecessor Company,
technical services was a cost centre within Air Canada and discrete financial
information is currently not available. As described in note 1, a capacity
purchase agreement between Air Canada and Jazz came into effect on September
30, 2004. The Jazz segment information in the Corporation is not directly
comparable as a result of this new agreement.

As described in note 2, the Corporation changed the accounting as of September
30, 2004 for the recognition of its revenues relating to the loyalty program.
As a result, Aeroplan results are not comparable to prior periods.

The accounting policies for each of these segments are the same as those
described in note 2. Segment financial information has been prepared consistent
with how financial information is produced internally for the purposes of
making operating decisions as further described in note 1. Segments negotiate
transactions between each other as if they were unrelated parties. A
reconciliation of the total amounts reported by each segment to the applicable
amounts in the consolidated financial statements follows:


<TABLE>
<CAPTION>

                                                                                  Successor Company
                                                    ---------------------------------------------------------------------------
                                                                         Year ended December 31, 2005
                                                   Transportation                                    Inter-Segment Consolidated
                                                      Services (a)    Aeroplan (b)   Jazz (c)   ACTS   Elimination       Total
                                                    ---------------------------------------------------------------------------

<S>                                                    <C>           <C>          <C>          <C>            <C>
    Passenger revenue                                   $  8,269      $     -      $     -      $    -         $  -    $  8,269
    Cargo revenue                                            620            -            -           -            -         620
    Other revenue                                            117          627           10         187            -         941
                                                       --------------------------------------------------------------------------
External revenue                                           9,006          627           10         187            -       9,830
    Inter-segment revenue                                    194           13        1,013         567       (1,787)          -
                                                       -------------------------------------------------------------------------
Total revenue                                              9,200          640        1,023         754       (1,787)      9,830
                                                       -------------------------------------------------------------------------

    Aircraft rent                                            343            -           80                       (6)        417
    Depreciation, amortization, and obsolescence             424            8           18          32            -         482
    Other operating expenses                               8,259          530          796         675       (1,781)      8,479
                                                       -------------------------------------------------------------------------
Total operating expenses                                   9,026          538          894         707       (1,787)      9,378

                                                       -------------------------------------------------------------------------
Operating income                                             174          102          129          47            -         452

Total non-operating income (expense), non-controlling       (167)          (2)         (11)        (14)           -        (194)
interest, foreign exchange, and income taxes
                                                       -------------------------------------------------------------------------
Segment Results                                        $       7      $   100      $   118      $   33      $     -    $    258
                                                       -------------------------------------------------------------------------
Total assets                                            $ 11,001          674          504         381         (713)   $ 11,847

Additions to capital assets                             $    849           12           16           5            -    $    882

</TABLE>


<PAGE>

<TABLE>
<CAPTION>

                                                                                  Successor Company
                                                 -----------------------------------------------------------------------------------
                                                                          Period ended December 31, 2004
                                                 Transportation                                       Inter-Segment  Consolidated
                                                  Services (a)   Aeroplan (b)    Jazz (c)    ACTS      Elimination      Total
                                                 -----------------------------------------------------------------------------------
<S>                                               <C>           <C>           <C>            <C>         <C>         <C>
  Passenger revenue                               $    1,681    $      -      $     -        $     -     $    -      $ 1,681
  Cargo revenue                                          151           -            -              -          -          151
  Other revenue                                           44         121            3             62          -          230
                                                 -----------------------------------------------------------------------------------
External revenue                                       1,876         121            3             62          -        2,062
  Inter-segment revenue                                   54           6          185            106       (351)           -
                                                 -----------------------------------------------------------------------------------
Total revenue                                          1,930         127          188            168       (351)       2,062
                                                 -----------------------------------------------------------------------------------

  Aircraft rent                                          103           -            9              -         (1)         111
  Depreciation, amortization, and obsolescence            73           1            4              7          -           85
  Other operating expenses                             1,812         104          153            150       (350)       1,869
                                                 -----------------------------------------------------------------------------------
Total operating expenses                               1,988         105          166            157       (351)       2,065

                                                 -----------------------------------------------------------------------------------
Operating income                                         (58)         22           22             11          -           (3)

Total non-operating income (expense), foreign            26            -           (4)            (4)         -           18
exchange, and income taxes

                                                 -----------------------------------------------------------------------------------
Segment Results                                   $      (32)   $     22      $    18        $     7     $    -      $    15
                                                 -----------------------------------------------------------------------------------

</TABLE>


Subsequent to the dilution in interests in Aeroplan, as described in note 13, a
non-controlling interest charge is recorded upon the consolidation of Aeroplan.
As Aeroplan's non-controlling interest is in a deficit position, the
non-controlling interest charge is equal to the greater of the non-controlling
interest holders' share of the Aeroplan earnings for the period or the amount
of distributions to the non-controlling interest holder during the period.

a) Includes transportation revenues for services provided both on Air Canada
and Jazz aircraft and costs for Air Canada operations and fees charged by Jazz
under the capacity purchase agreement, as well as Air Canada Cargo, Air Canada
Groundhandling, Air Canada Vacations, and ACE. Inter-segment revenue includes
management fees and costs and operating services charged to the other segments.
Interest expense in the Transportation Services segment represents interest on
all third party debt, except for interest on debt directly issued by Aeroplan
and Jazz. Interest expense included in other segments represents interest on
intercompany debt and third party debt. Management reflects all income taxes
within the Transportation Services segment including any income taxes that may
be applicable to amounts earned in the other segments because the activities of
the other segments are carried out as limited partnerships and the income is
taxable in certain entities included in Transportation Services.

Certain adjustments related to transactions between Air Canada and Aeroplan are
recorded within the Transportation Services segment. These adjustments relate
mainly to the revenue recognition timing difference from when Aeroplan records
revenues, at the time a Mile is redeemed for travel, to the consolidated
accounting policy of revenue recognition at the time reward transportation is
provided. In addition, Aeroplan records revenue from the redemption of Miles in
Other revenue, whereas on the consolidated financial statements, Miles redeemed
for travel on Air Canada and Jazz are recorded in Passenger revenue. In the
Aeroplan segment information, the cost to Aeroplan of purchasing rewards is
recorded in other operating expenses. The adjustment for these items for the
year ended December 31, 2005 is an add back of $370 to Other revenue and Other
operating expenses.

b) Other revenue includes revenue recognized on redemption of points
accumulated through both air and third party contracts. Inter-segment revenue
of $13 ($6 for the period ended December 31, 2004) represents the management
fee charged to Air Canada by Aeroplan relating to tier management, marketing
and other services related to the management of Air Canada's loyalty program.

c) Includes Jazz operations under the capacity purchase agreement effective
September 30, 2004.


<PAGE>
<TABLE>
<CAPTION>



                                                                                       Predecessor Company
                                                            ------------------------------------------------------------------------
                                                                                 Nine months ended September 30, 2004

                                                                Transportation                        Inter-Segment  Consolidated
                                                                  Services       Aeroplan    Jazz (d)   Elimination    Total
                                                            ------------------------------------------------------------------------

<S>                                                            <C>              <C>            <C>           <C>      <C>
      Passenger revenue                                        $    5,036       $      -       $ 592         $   -    $   5,628
      Cargo revenue                                                   393              -          12             -          405
      Other revenue                                                   457            343           5             -          805
                                                            ------------------------------------------------------------------------
External revenue                                                    5,886            343         609             -        6,838
      Inter-segment revenue                                           367             48           7          (422)           -
                                                            ------------------------------------------------------------------------
Total revenue                                                       6,253            391         616          (422)       6,838
                                                            ------------------------------------------------------------------------

      Aircraft rent                                                   498              -          27            (4)         521
      Depreciation, amortization, and obsolescence                    286              3          23             -          312
      Other operating expenses                                      5,416            310         577          (418)       5,885
                                                            ------------------------------------------------------------------------
Total operating expenses                                            6,200            313         627          (422)       6,718

                                                            ------------------------------------------------------------------------
Operating income (loss) before reorganization                          53             78         (11)            -          120
and restructuring items

Reorganization and restructuring items                               (815)             -         (56)            -         (871)
                                                            ------------------------------------------------------------------------

                                                                     (762)            78         (67)            -         (751)

Total non-operating income (expense), foreign                        (131)             1         (14)            -         (144)
exchange and income taxes

                                                            ------------------------------------------------------------------------
Segment Results                                                $     (893)      $     79       $ (81)        $   -    $    (895)
                                                            ------------------------------------------------------------------------

</TABLE>


d) Includes Jazz transportation revenues and costs from Jazz operations as
reported prior to implementation of the capacity purchase agreement on
September 30, 2004.

Geographic Information


                                     Successor Company      Predecessor Company
                             Year ended       Period ended    Nine months ended
                      December 31, 2005  December 31, 2004   September 30, 2004
                       ---------------------------------------------------------

Passenger revenue

    Canada                $     3,447      $     713         $    2,236
    US Transborder              1,570            321              1,160
    Atlantic                    1,727            318              1,212
    Pacific                       934            204                650
    Other                         591            125                370
                       ---------------------------------------------------------
Total passenger revenue   $     8,269      $   1,681         $    5,628
                       ---------------------------------------------------------


Passenger revenues for Canada are based on the actual flown revenue for flights
with an origin and destination in Canada. Passenger revenues for US Transborder
and other international destinations are based on the actual flown revenue for
flights with an origin or destination outside of Canada.

Property and Equipment

Air Canada is a Canadian based domestic and international carrier and while its
flight equipment is used on various routes internationally, for purposes of
segment reporting, the Corporation attributes the

<PAGE>


location of flight equipment to Canada. As a consequence, substantially all of
the Corporation's property and equipment are related to operations in Canada.


<PAGE>


16.  Commitments

In 2004, Air Canada signed definitive purchase agreements with Empresa
Brasileira de Aeronautica S.A. ("Embraer"), and Bombardier Inc. ("Bombardier")
for the acquisition of regional jet aircraft. In November 2005, Air Canada also
concluded agreements with The Boeing Company ("Boeing") for the acquisition of
Boeing 777 and Boeing 787 aircraft.

Boeing

On November 9, 2005, Air Canada announced agreements with Boeing for the
acquisition of up to 36 Boeing 777s and up to 60 Boeing 787 Dreamliners. The 36
Boeing 777s include firm orders for 18 aircraft plus purchase rights for 18
more, in a yet-to-be determined mix of the 777 family's newest models. Delivery
of the first seven 777 aircraft is scheduled for 2007, commencing in March. The
60 Boeing 787 Dreamliners includes firm orders for 14 aircraft plus options and
purchase rights for an additional 46 aircraft. Air Canada's first 787 is
scheduled for delivery in 2010. The Corporation has received financing
commitments from Boeing and the engine manufacturer covering all firm aircraft
orders for approximately 90 percent of the capital expenditure.

Embraer

The agreement with Embraer covers firm orders for 15 Embraer 175 series
aircraft as well as 45 Embraer 190 series aircraft. The purchase agreement also
contains rights to exercise options for up to 60 additional Embraer 190 series
aircraft as well as providing for conversion rights to other Embraer models.

Deliveries of the 15 Embraer 175 series aircraft commenced in July 2005 and the
last aircraft was delivered in January 2006. All Embraer 175 deliveries were 80
percent financed by a third party.

The Embraer 190 series deliveries commenced in December 2005. At December 31,
2005, three of the Embraer 190 series firm aircraft orders have been completed
and the remaining 42 deliveries are planned to be completed by January 2008.
For the first 18 firm Embraer 190 deliveries, the Corporation has received loan
commitments from a syndicate of banks and the manufacturer covering 80 percent
of the capital expenditure. For the remaining 27 firm Embraer 190 deliveries,
the Corporation has received loan commitments from the manufacturer covering 85
percent of the capital expenditures.

Bombardier

The agreement with Bombardier covered firm orders for 15 Bombardier CRJ700
Series 705 aircraft and 15 Bombardier CRJ200 aircraft, all of which were
delivered by the end of 2005. The agreement with Bombardier contains orders for
15 additional Bombardier CRJ200 aircraft which can be cancelled without
penalty. The agreement also contains options for an additional 45 aircraft. As
of February 9, 2006, no commitments have been made on the cancellable orders or
on the additional options for 45 aircraft. The Corporation will also receive
financing commitments of 85 percent of capital expenditures from the
manufacturer on the cancellable aircraft orders should the Corporation decide
to commit to acquire these aircraft.

Aircraft Reconfiguration

On November 10, 2005, Air Canada announced its intention to provide all-new
seating across its entire fleet, featuring state-of-the-art lie-flat seats for
its international Executive First customers. In addition, Air Canada is
outfitting its Executive Class cabins on North American routes with new premium
seats, and all of its Hospitality cabins fleet-wide will be reconfigured with
new seats offering personal seat back entertainment systems with an increased
choice of audio and video programming.

Capital Commitments

The estimated aggregate cost of the future firm deliveries as well as other
capital purchase commitments approximates $6,055 excluding the 15 Bombardier
CRJ200 aircraft which may be cancelled without penalty. US dollar amounts are
converted using the December 31, 2005 noon day rate of CDN$1.1659. The
estimated aggregate cost of aircraft is based on delivery prices that include
estimated escalation and, where applicable, deferred price delivery payment
interest calculated based on the 90-day LIBOR rate at December 31, 2005.
Committed payments are as follows:

       2006                  $     826
       2007                      1,950
       2008                      1,213
       2009                        428
       2010                        837
    Thereafter                     801
                        ---------------
                            $    6,055
                        ---------------

Operating Lease Commitments

Future minimum lease payments under existing operating leases of aircraft and
other property amount to $3,416 (December 31, 2004 $3,347) using period end
exchange rates.


                                 Aircraft           Other Property

              2006               $      458             $      83
              2007                      406                    68
              2008                      335                    51
              2009                      300                    37
              2010                      259                    28
           Thereafter                 1,237                   154
                           ---------------------------------------
                                 $    2,995             $     421
                           ---------------------------------------


Lease payments for aircraft classified as capital leases and variable interest
entities for accounting purposes are disclosed in note 7 "Long-Term Debt and
Capital Lease Obligations".

The future minimum non-cancellable commitments under the capacity purchase
agreements with unaffiliated regional carriers are $10 in 2006.


<PAGE>


17.  Financial Instruments and Risk Management

Under its risk management policy, the Corporation manages its exposure to
changes in interest rates, foreign exchange rates and jet fuel prices through
the use of various derivative financial instruments. The Corporation uses
derivative financial instruments only for risk management purposes, not for
generating trading profit.

Interest Rate Risk Management

The Corporation enters into forward interest rate agreements, with maturities
of less than 18 months, to manage the risks associated with interest rate
movement on US and Canadian floating rate debt and investments. During 2005,
the Corporation reached a settlement with a third party related to interest
rate swaps that were terminated as a result of Air Canada's filing for CCAA on
April 1, 2003. A dispute had arisen following termination between Air Canada
and the unrelated third party with respect to replacement arrangements for the
swaps. The settlement agreement provided for a payment to Air Canada of US$8
related to a portion of the net payments the Corporation would have received
had the swaps not been terminated. The replacement swaps that were put in place
with another unrelated third party have a fair value of $9 in favour of the
Corporation on inception. As a result of these transactions, the Corporation
recorded a gain of $17 net of transaction fees of $3. The swaps have a term to
January, 2024 and convert lease payments related to two B767 aircraft leases
consolidated under AcG-15, from fixed to floating rates. These have not been
designated as hedges for accounting purposes. As at December 31, 2005, these
two swaps have a fair value of $7 in favour of the Corporation.

Foreign Exchange Risk Management

The Corporation enters into certain foreign exchange forward contracts or
currency swaps to manage the risks associated with foreign currency exchange
rates. As at December 31, 2005, the Company had entered into foreign currency
forward contracts and option agreements on US$521 of future purchases in 2006.
The fair value of these foreign currency contracts as at December 31, 2005 is
$1 in favour of third parties. These derivative instruments have not been
designated as hedges for accounting purposes. The unrealized loss has been
recorded in foreign exchange. The Corporation had no foreign exchange forward
contracts outstanding as at December 31, 2004.

The Corporation has entered into currency swap agreements for 16 Canadair
Regional Jet (CRJ) operating leases until lease terminations between 2007 and
2011. Currency swaps for five CRJ operating leases, with third parties, were
put in place on the inception of the leases and have a fair value at December
31, 2005 of $13 in favour of the third parties (2004 $12 in favour of third
parties), taking into account foreign exchange rates in effect at that time.
Currency swaps for 11 CRJ operating leases with third parties, have a fair
value at December 31, 2005 of $3 in favour of the Corporation. These have not
been designated as hedges for hedge accounting purposes. The unrealized changes
in fair value have been recorded in foreign exchange gain or loss.

Fuel Price Risk Management

The Corporation enters into contracts with financial intermediaries to manage
its exposure to jet fuel price volatility. The Corporation had no fuel hedging
agreements outstanding as at December 31, 2004. As of December 31, 2005, the
Corporation had collar option structures in place to hedge a portion of its
anticipated jet fuel requirements over the 2006 to 2007 period. Since jet fuel
is not traded on an organized futures exchange, liquidity for hedging this
commodity is mostly limited to a shorter time horizon. Crude

<PAGE>


oil and heating oil contracts are effective commodities for hedging jet fuel
and the Corporation uses these commodities for medium to longer term hedges.
As of December 31, 2005, the majority of the Company's first quarter 2006
hedges are effectively jet fuel-based contracts. For 2006, the majority of the
remainder of the Corporation's hedge positions are effectively in the form of
heating oil-based contracts. The majority of the remaining hedge positions are
crude oil-based contracts. Hedge accounting was applied prospectively from
October 1, 2005. Under hedge accounting, gains or losses on fuel hedging
contracts are recognized in earnings as a component of aircraft fuel expense
when the underlying jet fuel being hedged is consumed. Prior to these
derivative instruments being designated as hedges for accounting purposes, an
unrealized gain of $2 was recorded in other non-operating expense. The
Corporation recognized a net loss of $3 as a component of fuel expense on the
consolidated statement of operations. The fair value of the Company's fuel
hedging agreements at December 31, 2005 was $3 in favour of third parties.

Concentration of Credit Risk

The Corporation does not believe it is subject to any significant concentration
of credit risk. Cash and short-term investments are in place with major
financial institutions, Canadian governments and major corporations. Accounts
receivable are generally the result of sales of tickets to individuals through
geographically dispersed travel agents, corporate outlets, or other airlines,
often through the use of major credit cards.

Statement of Financial Position Financial Instruments - Fair Values

The carrying amounts reported in the consolidated statement of financial
position for cash and short-term investments, accounts receivable and accounts
payable approximate fair values due to the immediate or short-term maturities
of these financial instruments.

The fair value of the investment in US Airways is $217 as at December 31, 2005
compared with a carrying value of $87. The fair value of long-term debt and
capital lease obligations as at December 31, 2005 approximates its carrying
value.

<PAGE>


18.  Contingencies, Guarantees and Indemnities

Contingencies

WestJet

Air Canada as well as Zip Air Inc. (a subsidiary of Air Canada) filed an action
in the Ontario Superior Court against WestJet Airlines Ltd. ("WestJet") and
seven of its current and former employees (the "Air Canada Action") arising out
of their misuse of Air Canada's confidential information relating to flights
and load factors from an internal web site. Air Canada successfully sought an
injunction prohibiting WestJet from making further use of the confidential
information. The claim seeks an order requiring WestJet to disgorge incremental
revenue and profits arising from the misuse of such confidential information,
damages for spoliation and punitive damages aggregating in excess of $220.
WestJet and Mark Hill, founding member and former Vice President of Strategic
Planning for WestJet, have each counterclaimed against Air Canada, Zip Air Inc.
(the "WestJet Counterclaims"), IPSA (security firm engaged by Air Canada) and
two of the latter's employees alleging trespass and illegal access and use of
confidential information of WestJet and Mark Hill. The WestJet Counterclaims
are for $10 plus certain other unquantified damages. In addition, WestJet filed
a separate lawsuit against Air Canada, Zip Air Inc., and certain of their
present and former officers (the "WestJet Action") alleging abuse of process,
tortious litigation and conspiracy to injure WestJet. The amount claimed in the
WestJet Action is $30 plus other unquantified damages.

By Order dated May 25, 2005, upon a motion to dismiss filed by Air Canada and
Zip Air Inc. the Honourable Justice Nordheimer of the Ontario Superior Court of
Justice dismissed the WestJet Action. An appeal of this decision is pending.
The Air Canada Action and the WestJet Counterclaims are still at a preliminary
stage. Document production is ongoing and examinations on discovery have been
set to start in May 2006.

It is the opinion of Management that the claims and counterclaims of WestJet
and Mark Hill are without merit and further that the resolution of these
lawsuits will not have a material adverse effect on the Corporation's
consolidated financial position. The outcome of these claims and counterclaims
cannot be determined at this point and the financial statements do not include
any amounts related to these claims or counterclaims.

Pay Equity

Complaints filed in 1991 and 1992 with the Canadian Human Rights Commission
against Air Canada and the former Canadian Airlines International on behalf of
flight attendants at the two airlines alleging discrimination in negotiated
wages were referred to the Canadian Human Rights Tribunal in 1996 for inquiry.
By agreement of all parties, the inquiry before the Tribunal was limited to
whether flight attendants at each airline were in the same establishment as
pilots and technical operations personnel. Under the applicable legislation, a
complaint can only compare the value of employees work and their wages if they
work in the same establishment. In December 1998 the Tribunal found that
pilots, flight attendants and technical operations personnel were in different
establishments at each airline. This decision was upheld on judicial review by
the Federal Court Trial Division, but overturned by the Federal Court of Appeal
in 2004. The Supreme Court of Canada in January 2006 dismissed Air Canada's
appeal from this latter decision and has remitted the complaints to the
Commission for investigation. The value of each employee group's work will be
assessed on the basis of the skill, effort and responsibility it demands as
well as the conditions under which it is performed. During the restructuring
under CCAA, it was agreed that any resolution of the complaints would have no
retroactive financial impact prior to September 30, 2004.

<PAGE>


Air Canada, upon consultation with legal counsel, considers that any
investigation will show that it is complying with the equal pay provisions of
the Canadian Human Rights Act.

Other

Various other lawsuits and claims, including claims filed by various of the
Company's labour groups, are pending by and against the Corporation and
provisions have been recorded where appropriate. It is the opinion of
management that final determination of these claims will not have a significant
material adverse effect on the financial position or the results of the
Corporation.

Claims against the Predecessor Company, whether filed or unfiled, for events
that occurred before April 1, 2003 and in certain cases up to September 30,
2004 (as described in note 19) have been compromised and discharged pursuant to
the CCAA Plan and Sanction Order.

Guarantees

Residual Value Guarantees in Aircraft Leasing Agreements

With respect to 35 GECC owned aircraft leases and 10 GECC managed aircraft
leases (refer to note 19), the difference between the amended rents from the
restructuring arrangements and amounts due under the original lease contracts
will be forgiven at the expiry date of the leases if no material defaults have
occurred. If a material default occurs, this difference plus interest will
become due and payable and all future rent will be based on the original
contracted rates. Rent expense is being recorded on the renegotiated lease
agreements and any liability would be recorded only at the time management
believes the amount is likely to occur.

Guarantees in Fuel Facilities Arrangements

The Corporation participates in fuel facilities arrangements, along with other
airlines that contract for fuel services at various airports in Canada. The
Fuel Facilities Corporations operate on a cost recovery basis. The purpose of
the Fuel Facilities Corporations is to own and finance the system that
distributes the fuel to the contracting airlines, including leasing the Land
Rights under the land lease. The aggregate debt of the five Fuel Facilities
Corporations in Canada that have not been consolidated by the Corporation under
AcG-15 is approximately $87 as at December 31, 2005, which is the Corporation's
maximum exposure to loss without taking into consideration any cost sharing
that would occur amongst the other contracting airlines. The Corporation views
this loss potential as remote. Each Contracting Airline shares pro rata, based
on system usage, in the guarantee of this debt.

Under the terms of its land leases, the Fuel Facilities Corporations have an
obligation to restore the land to vacant condition at the end of the lease and
to rectify any environmental damage for which it is responsible. If it was
found that the Fuel Facilities Corporations had to contribute to any
remediation costs, each contracting airline would share pro rata, based on
system usage, in the costs. For Fuel Facilities Corporations that are
consolidated, the Corporation has recorded an obligation of $2 ($12
undiscounted) representing the present value of the estimated decommissioning
and remediation obligations at the end of the lease, with lease term expiry
dates ranging from 2032 to 2039. This estimate is based on numerous assumptions
including the overall cost of decommissioning and remediation and the selection
of alternative decommissioning and remediation approaches.

<PAGE>


Indemnification Agreements

The Corporation enters into real estate leases or operating agreements, which
grant a license to the Corporation to use certain premises, in substantially
all cities that it serves. It is common in such commercial lease transactions
for the Corporation as the lessee to agree to indemnify the lessor and other
related third parties for tort liabilities that arise out of or relate to the
Corporation's use or occupancy of the leased or licensed premises.
Exceptionally, this indemnity extends to related liabilities arising from the
negligence of the indemnified parties, but usually excludes any liabilities
caused by their gross negligence or wilful misconduct. Additionally, the
Corporation typically indemnifies such parties for any environmental liability
that arises out of or relates to its use or occupancy of the leased or licensed
premises.

In aircraft financing or leasing agreements, the Corporation typically
indemnifies the financing parties, trustees acting on their behalf and other
related parties and/or lessors against liabilities that arise from the
manufacture, design, ownership, financing, use, operation and maintenance of
the aircraft and for tort liability, whether or not these liabilities arise out
of or relate to the negligence of these indemnified parties, except for their
gross negligence or wilful misconduct. In addition, in aircraft financing or
leasing transactions, including those structured as leveraged leases, the
Corporation typically provides indemnities in respect of certain tax
consequences.

In technical service agreements entered into with certain types, and a limited
number, of customers, such as financing parties (typically aircraft lessors
that require technical services prior to leasing the aircraft), the Corporation
exceptionally indemnifies the customer, usually up to an agreed-upon indemnity
threshold, against liabilities that arise from the Corporation's negligence.

When the Corporation, as a customer, enters into technical service agreements
with service providers, primarily service providers who operate an airline as
their main business, the Corporation has from time to time agreed to indemnify
the service provider against liabilities that arise from third party claims,
whether or not these liabilities arise out of or relate to the negligence of
the service provider, but excluding liabilities that arise from the service
provider's gross negligence or wilful misconduct.

Under its general by-laws, the Corporation has indemnification obligations to
its directors and officers. Pursuant to such obligations, the Corporation
indemnifies these individuals, to the extent permitted by law, against any and
all claims or losses (including amounts paid in settlement of claims) incurred
as a result of their service to the Corporation.

The maximum amount payable under the foregoing indemnities cannot be reasonably
estimated. The Corporation expects that it would be covered by insurance for
most tort liabilities and certain related contractual indemnities described
above.

<PAGE>


19.  The Plan and Other Restructuring Arrangements

The Plan

On April 1, 2003, Air Canada obtained an order from the Ontario Superior Court
of Justice (the "Court") providing creditor protection under CCAA. On April 1,
2003, Air Canada, through its Court-appointed Monitor, also made a concurrent
petition for recognition and ancillary relief under Section 304 of the U.S.
Bankruptcy Code. The CCAA and US proceedings covered Air Canada and the
following of its wholly-owned subsidiaries: Jazz Air Inc., Zip Air Inc.,
3838722 Canada Inc., Air Canada Capital Ltd., Manoir International Finance
Inc., Simco Leasing Ltd., and Wingco Leasing Inc. (collectively, the
"Applicants"). Air Canada Vacations, Aeroplan, Maple Leaf Holdings USA Inc.
and Destina.ca Inc. were not included in the filings. During the proceedings,
the Applicants continued to operate under Court protection.

On August 17, 2004, the creditors approved the Plan and on August 23, 2004, the
Plan was confirmed pursuant to an order of the Court. The Plan was implemented
through a series of steps which were completed on September 30, 2004 (except as
to the winding up of Zip which occurred on October 1, 2004). Accordingly, on
September 30, 2004, the Applicants emerged from CCAA and ACE became the parent
company of Air Canada and its subsidiaries.

The confirmed Plan provided for the following:

     o    A corporate reorganization of Air Canada and its subsidiaries into
          separate business units resulting in the following operating
          subsidiaries of ACE: Air Canada, Air Canada Cargo, Air Canada
          Groundhandling, Air Canada Vacations, Destina.ca Inc., AC Online
          Limited Partnership, Aeroplan, Jazz, and ACTS.

     o    The affected unsecured creditors' claims were settled, compromised
          and released in exchange for 46,250,000 shares in ACE and rights to
          acquire further shares pursuant to a rights offering (the "Rights
          Offering"). Additional information on the share capital of ACE is
          described in note 12. In accordance with the Plan, shares were held
          in escrow pending resolution of disputed unsecured claims. Once
          claims were resolved, the disbursing agent distributed the shares in
          accordance with the provisions of the Plan with the exception of
          27,927 shares that continue to be held in escrow by the Monitor
          pending resolution of tax obligations with governmental obligations.
          None of these shares held in escrow will return to ACE or any of its
          subsidiaries.

     o    All issued and outstanding options of Air Canada, including the
          conversion feature in the convertible subordinated debentures, and
          warrants were cancelled without payment or consideration.

     o    Holders of Air Canada's Class A non-voting common shares received a
          nominal number of ACE Class A Variable Voting Shares and holders of
          Air Canada's common shares received a nominal number of ACE Class B
          Voting Shares representing approximately 0.01% of the fully diluted
          equity of ACE. In total, 10,104 shares were issued to the holders of
          Air Canada's common shares.

     o    Air Canada's Class A Convertible Participating Non-Voting
          Convertible Preferred Shares (Series 1) were converted into Air
          Canada Redeemable Shares which were redeemed for an aggregate
          consideration of one dollar.

<PAGE>


     o    A comprehensive release in favour of the Applicants of all claims of
          Affected Unsecured Creditors based upon any matters up until
          September 30, 2004 other than certain categories of excluded claims
          (including affirmed contracts and claims arising from the supply of
          goods and services after the date of filing) as specified in the
          Plan and Sanction Order.

Global Restructuring Agreement

All transactions contemplated by the Global Restructuring Agreement ("GRA")
with General Electric Capital Corporation and its affiliates ("GECC") became
effective on September 30, 2004.

Under the GRA, leases related to 106 operating, parked and undelivered aircraft
were restructured resulting in a reduction of lease rates for 47 aircraft,
termination of obligations for 20 parked aircraft, the cancellation of four
future aircraft lease commitments and the restructuring of the overall
obligations with respect to six aircraft.

Prior to filing for CCAA on April 1, 2003, the Predecessor Company had payment
and purchase obligations in respect of two B747 aircraft with GECC. As a
condition of the GRA, on September 30, 2004, Air Canada acquired these two
aircraft, with a fair market value of $63, from GECC for an aggregate amount of
$353. GECC provided financing in the amount of US$50, of which US$25 was repaid
during the three months ended December 31, 2004 upon the sale of one of the
aircraft, and the remainder was repaid in January 2005 upon the sale of the
second aircraft. The difference of $290 was paid to GECC on September 30, 2004,
under the terms of the GRA. This one-time payment of $290 has been classified
as a cash flow used for the operating activities of ACE.

GECC provided ACE with an Exit Facility in the amount of $540 before fees of
$13. The terms and conditions of this Exit Facility are set out in note 7. Cash
proceeds received under the Exit Facility were reduced by the amount drawn
under the DIP Loan Agreement as at September 30, 2004 of $300. In addition, ACE
provided cash collateralization of certain outstanding letters of credit
totalling $21. This amount is recorded under other assets. The Corporation
further paid an amount of $45 to GECC related to restructuring certain
obligations with GECC. An amount of $37 has been allocated to certain ongoing
lease arrangements and $8 to standby financing with GECC in the Corporation. As
a result of this payment, the warrants as outlined in the GRA were not issued.

Rights Offering and Standby Purchase Agreement

As part of the Plan, the affected unsecured creditors were entitled to
subscribe for up to 42,500,000 ACE Class B Voting Shares and/or ACE Class A
Variable Voting Shares or approximately 42.06% of the Fully Diluted Equity of
ACE as of September 30, 2004 pursuant to the Rights Offering. In accordance
with a Standby Purchase Agreement (the "Standby Purchase Agreement") entered
into with Deutsche Bank Securities Inc. ("DB"), ACE completed the issuance of
42,500,000 shares under its rights offering for proceeds of $865 before fees of
$13. DB and its participants acquired, as standby purchasers, 9,829,339 Class A
Variable Voting Shares relating to unexercised rights.

Investment Agreement

In accordance with an investment agreement (the "Investment Agreement") with
Cerberus ACE Investment, LLC and Promontoria Holding III B.V., affiliates of
Cerberus Capital Management L.P. (collectively, "Cerberus"), ACE issued
12,500,000 Convertible Preferred Shares for an aggregate consideration of $250
before expenses of $12. See note 12 for further details related to the
Convertible Preferred Shares.

<PAGE>



Pension Plan Arrangements

 On September 30, 2004, with the agreement of the Office of the Superintendent
of Financial Institutions, Air Canada issued a series of subordinated security
promissory notes in the aggregate amount of approximately $347 in favour of the
pension plan trustee. See note 9 for further details on these notes.

<PAGE>


20.  Fresh Start Reporting

ACE applied fresh start reporting on September 30, 2004. As a result, all
consolidated assets and liabilities of the Corporation have been reported at
fair values, except for future income taxes which are reported in accordance
with the requirements of Section 3465 of the CICA Handbook, Income Taxes. As a
result of the implementation of the Plan and the application of fresh start
reporting, a revaluation adjustment of $3,342 has been recorded as a credit to
the Predecessor's Shareholders' Equity and the deficit and contributed surplus
of Air Canada as at September 30, 2004 has been reclassified to the
Predecessor's Shareholders' Equity. The resulting deficit of $2,700, net of
contributed surplus of $175 was reclassified to the Predecessor's share capital
and other equity. The fair values of the consolidated assets and liabilities of
the Corporation have been based on Management's best estimates and on valuation
techniques as of September 30, 2004. As the result of the application of fresh
start accounting (whereby the liabilities of the Corporation exceed the total
assets of the Corporation excluding any implied goodwill) and the financing
transactions that occurred on September 30, 2004, the Corporation's
Shareholders' Equity was $186.

<PAGE>


<TABLE>
<CAPTION>

                                            Air Canada                                                               ACE
                                            Predecessor                                                            Successor
                                             Company -                                              Equity and      Company -
                                           September 30,       Plan of        Fresh Start      Other Financing    September 30,
                                               2004         Arrangement (a)    Reporting (f)     Transactions         2004
                                         ---------------   --------------   ---------------     --------------    -------------
ASSETS

Current assets
<S>                                         <C>               <C>             <C>               <C>                <C>
   Cash and cash equivalents                $       957       $     -         $        -        $       227 (b)    $      1,939
                                                                                                        852 (c)
                                                                                                        238 (d)
                                                                                                       (335)(e)
   Restricted cash                                   62             -                  -                  -                  62
   Accounts receivable                              723             -                  -                  -                 723
   Spare parts, materials and supplies              190             -                 11                  -                 201
   Prepaid expenses                                 129             -                 10                  -                 139
                                         ---------------   -----------      ------------     --------------     ---------------
                                                  2,061             -                 21                982               3,064

Property and equipment                            3,749             -               (149)                64               3,664

Deferred charges                                  3,175             -             (3,033)                19                 161

Goodwill                                            510             -               (510)                 -                   -

Intangible assets                                   158             -               2,561                 -               2,719

Other assets                                        443             -               (343)                 -                 100
                                         ---------------   -----------      ------------     --------------     ---------------

TOTAL ASSETS                                  $  10,096       $     -         $   (1,453)          $  1,065        $      9,708
                                         ---------------   -----------      ------------     --------------     ---------------

LIABILITIES

Liabilities not subject to compromise

  Current liabilities
   Accounts payable and accrued
   liabilities                             $      1,199       $     -         $      112           $      -        $      1,311
   Advance ticket salesand loyalty
   program deferred revenues                        861             -                268                  -               1,129
   Current portion of long-term debt
   and capital lease obligations                    558             -               (319)                 -                 239
                                         ---------------   -----------      ------------     --------------     ---------------
                                                  2,618             -                 61                  -               2,679

  Long-term debt and capital lease
   obligations                                    1,425             -                789                303               2,517

  Convertible preferred shares                        -             -                  -                127                 127

  Future income taxes (h)                             8             -                235                  -                 243

  Pension and other benefit
  liabilities (g)                                 1,072             -              1,296                                  2,368

  Other long-term liabilities                     1,284             -                304                                  1,588

  Deferred credits                                  758             -               (424)              (334)                  -
                                         ---------------   -----------      ------------     --------------     ---------------
                                                  7,165             -              2,261                 96               9,522

Liabilities subject to compromise (i)             7,981        (7,981)                 -                  -                   -
                                         ---------------   -----------      ------------     --------------     ---------------
                                                 15,146        (7,981)             2,261                 96               9,522
                                         ---------------   -----------      -------------     --------------     ---------------

SHAREHOLDERS'  EQUITY

Share capital and other equity                      967           925             (2,525)               852                 186
                                                                 (125)                                  117
                                                                  (25)                 -
Contributed surplus                                  25           150               (175)                 -                   -
Deficit                                          (6,042)        7,056             (1,014)                 -                   -
                                         ---------------   -----------     -------------     --------------     ---------------
                                                 (5,050)        7,981             (3,714)               969                 186
                                         ---------------   -----------     -------------     --------------     ---------------
TOTAL LIABILITIES AND
  SHAREHOLDERS' EQUITY                     $     10,096       $     -         $   (1,453)          $  1,065       $       9,708
                                         ---------------   -----------     -------------     --------------     ---------------

</TABLE>



<PAGE>


The following legend describes the adjustments made to the Predecessor accounts
resulting from the implementation of the Plan and consummation of the various
agreements described in note 19:

     a)   Implementation of the Plan.
     b)   Implementation of the Exit Facility under the GRA.
     c)   Issuance of shares for cash under the Rights Offering and the
          Standby Purchase Agreement.
     d)   Issuance of Convertible Preferred Shares for cash under the
          Investment Agreement.
     e)   Implementation, under the GRA, of the purchase of two B747 aircraft
          with GECC and the payment of $45 to GECC related to restructuring
          certain obligations with GECC.
     f)   Comprehensive revaluation of assets and liabilities.
     g)   The effect of the issuance of the subordinated security promissory
          notes described in note 9 is also included within the fair value of
          the obligation for pension benefits as at September 30, 2004.
     h)   Future income taxes have been adjusted to reflect the tax effects of
          differences between the fair value of identifiable assets and
          liabilities and their estimated tax bases and the benefits of any
          unused tax losses and other deductions to the extent that these
          amounts are more likely than not to be realized. The resulting
          future income tax amounts have been measured based on the rates
          substantively enacted that are expected to apply when the temporary
          differences reverse or the unused tax losses and other deductions
          are realized. It has been assumed that certain intangibles with a
          fair value as at the date of fresh start reporting of approximately
          $1,431, with no underlying tax cost, have indefinite lives and
          accordingly, the associated future income tax liability of $243 is
          not expected to reverse until the intangible assets are disposed of
          or become amortizable.
     i)   Liabilities subject to compromise as accrued by the Applicants
          totalled $7,981. Differences from the minimum potential claims of
          $8,205 as reported by the Monitor arise primarily from the
          difference in foreign exchange rates as at April 1, 2003, the rates
          used in the claims resolution process, and the current rates as at
          September 30, 2004.

<PAGE>


21.  Reorganization and Restructuring Items

Cash expenditures related to reorganization and restructuring items for the
nine months ended September 30, 2004 amounted to $85 and relate mainly to the
payment of professional fees. Reorganization and restructuring items are nil in
2005 as no charges have been recorded in the Corporation. The table below
summarizes reorganization and restructuring charges recorded by the Predecessor
Company.


                                                     Predecessor Company
                                                        Nine Months
                                                           Ended
                                                       September 30,
                                                            2004
                                                     -----------------

Repudiated and renegotiated leases and contracts (a)    $      529

Labour related items (b)                                       279

Foreign exchange adjustments on compromised debt               (84)

Professional fees                                              158

Interest income on accumulated cash (c)                        (17)

Other                                                            6

                                                     -----------------
 Reorganization and restructuring items, net            $      871
                                                     -----------------


a) Repudiated and renegotiated contracts, including aircraft lease agreements,
represents the estimated allowable claim resulting from contracts that have
been terminated and the amortization of deferred charges related to deficiency
claims on renegotiated contracts.

b) Labour related items of $279 during the nine months ended September 30, 2004
include voluntary and involuntary severance programs accruals of $117 as well
as $162 of amortization on the estimated compromised claim related to the
Predecessor Company's employee groups. Refer to note 10 Other long-term
liabilities for additional information on these and other labour related
restructuring provisions.

c) Interest income earned by an entity under creditor protection, that it would
not have earned but for the proceedings, is reported as a reorganization and
restructuring item. The interest income recorded in reorganization items is due
mainly to the cash balances retained by the Predecessor Company as a result of
the moratorium on aircraft lease payments and the stay on actions to collect
pre-filing indebtedness, including trade payables.

<PAGE>


22.      Condensed Combined Financial Statements

Consolidated financial statements of an entity under creditor protection that
include one or more entities in reorganization proceedings and one or more
entities not in reorganization proceedings should include disclosure of
condensed combined financial statements of the entities in reorganization
proceedings. The following are the condensed combined Statement of Operations
and Statement of Cash Flow of the entities of the Predecessor Company that were
in CCAA for the nine months ended September 30, 2004. Included in the Statement
of Operations for the nine months ended September 30, 2004 are intercompany
revenues of $301 and expenses of $184 with non-Applicants.

Condensed Combined Statement of Operations
-------------------------------------------------------------------------------
                                                            Predecessor Company
                                                              Nine Months Ended
                                                              September 30, 2004
                                                            --------------------

   Operating revenues                                          $         6,581
   Operating expenses                                                    6,596
                                                            -------------------
   Operating loss before reorganization and
   restructuring items                                                     (15)
   Reorganization and restructuring items (note 21)                       (871)
   Net interest expense                                                   (171)
   Loss on sale of assets                                                  (74)
   Other non-operating income, including equity income                     129
                                                            -------------------

   Loss before foreign exchange on non-compromised long-term
     monetary items and income taxes                                    (1,002)
   Foreign exchange on non-compromised long-term
   monetary items                                                          107
                                                            -------------------
   Loss before income taxes                                               (895)
   Provision for income taxes                                                -
                                                             -------------------
   Loss for the period                                         $          (895)
                                                            -------------------


Condensed Combined Statement of Cash Flow
--------------------------------------------------------------------------------

                                                              Nine Months Ended
                                                              September 30, 2004
                                                            -------------------

   Net cash provided by operating activities                   $           320
   Financing
     Aircraft related borrowings                                           233
     Reduction of long-term debt and capital lease obligations            (358)
     Drawdown on GE DIP financing                                          300
     Credit facility borrowings                                             80
                                                            -------------------
                                                                           255
                                                             -------------------
   Investing
     Additions to property and equipment                                  (320)
     Proceeds from sale of assets                                            1
                                                            -------------------
                                                                          (319)
                                                            -------------------
   Increase in cash and cash equivalents                                   256
   Cash and cash equivalents, beginning of period                          697
                                                            -------------------
   Cash and cash equivalents, end of period                    $           953
                                                            -------------------


<PAGE>


23.  ACE Aviation Holdings Inc. / Air Canada
     Differences Between Generally Accepted Accounting Principles in Canada
     and the United States
     (Canadian dollars - millions except per share data)

The consolidated financial statements of the Corporation (and Predecessor
Company) have been prepared in accordance with Canadian generally accepted
accounting principles ("Canadian GAAP"), which differ in certain respects from
accounting principles generally accepted in the United States (US GAAP). The
following represents the principal differences affecting statements of
operations and retained earnings, financial position, and cash flows as well as
additional disclosures required by US GAAP.

As outlined in notes 1, 2, 19 and 20, Air Canada emerged from creditor
protection on September 30, 2004 and became a subsidiary of ACE Aviation
Holdings Inc.


<PAGE>

<TABLE>
<CAPTION>

                                                                                                       Predecessor
                                                                    Successor Company                    Company
                                                              Year ended          Period ended      Nine months ended
                                                             December 31,          December 31,       September 30,
                                                         ------------------------------------------------------------------
                                                                2005                  2004                  2004
                                                         ------------------------------------------------------------------

<S>                                                        <C>                  <C>                    <C>
Income (loss) for the period in accordance with
Canadian GAAP                                              $     258            $      15              $   (895)

Aircraft introduction costs (1)                                    -                    -                     5
Derivative instruments (2)                                       (11)                   -                   (32)
Residual value guarantee adjustment (3)                            -                    -                    14
Pension valuation allowance (4)                                    -                    -                    (6)
Pre-operating costs (5)                                            -                    -                     6
Convertible securities (6)                                        41                  (99)                    -
Variable interest entity adjustment (7)                            -                   35                    11
Amortization of intangible assets (8)                             (3)                   -                     -
Goodwill impairment (8)                                          (12)
Aeroplan dilution gain reduction (8)                             (82)
Gain on discharge of compromised liabilities (12)                  -                    -                 7,056
Fresh start reporting (12)                                         -                    -                (1,501)
                                                         ------------------------------------------------------------------
Income adjustments for the period before the following           (67)                 (64)                5,553

Cumulative effect of change in accounting policy -
Variable interest entity adjustment (7)                            -                    -                  (178)
Income tax adjustment (8)                                         19                   (2)                    -
Non-controlling interest - Variable interest entity                -                   (2)                   (5)
                                                         ------------------------------------------------------------------
Respective period income adjustments                             (48)                 (68)                5,370
                                                         ------------------------------------------------------------------
Income (loss) for the period in accordance with US GAAP          210                  (53)                4,475
                                                         ------------------------------------------------------------------
Minimum pension liability adjustment, net of tax of $82(4)         (162)                  (2)                   (2)

Available-for-sale securities, net of tax of $22 (11)            108                    -                     -

Fresh start reporting (12)                                         -                    -                   491
                                                         ------------------------------------------------------------------
Comprehensive income (loss) for the period in
accordance with US GAAP                                    $     156            $     (55)             $  4,964
                                                         ------------------------------------------------------------------

Earnings (loss) per share - US GAAP
- Basic                                                    $    1.94            $   (0.65)             $  38.27
- Diluted                                                  $    1.84            $   (0.65)             $  33.05

</TABLE>


<PAGE>


                                                         Successor Company

                                                  December 31,     December 31,
                                                      2005             2004
Property and equipment
Balance under Canadian GAAP                     $     5,494         $   3,684
Variable interest entity adjustment  (7)                  -             1,417
                                                ------------------------------
Balance under US GAAP                           $     5,494         $   5,101
                                                ==============================
Deferred charges
Balance under Canadian GAAP                     $       145         $     167
Deferred finance charges (6)                             (2)               (6)
Variable interest entity adjustment (7)                   -               (15)
                                                ------------------------------
Balance under US GAAP                           $       143         $     146
                                                ==============================
Goodwill
Balance under Canadian GAAP                     $         -         $      -
Goodwill (8)                                          1,452             1,583
                                                ------------------------------
Balance under US GAAP                           $     1,452         $   1,583
                                                ==============================
Intangible Assets
Balance under Canadian GAAP                     $     2,462         $   2,703
Variable interest entity adjustment (7)                  -                (39)
Goodwill (8)                                            146                11
                                                ------------------------------
Balance under US GAAP                           $     2,608         $   2,675
                                                ==============================
Other assets
Balance under Canadian GAAP                     $       392         $     137
Derivative Instruments (2)                              (11)
Variable interest entity adjustment (7)                   -               111
Available for sale securities (11)                      130                 -
                                                ------------------------------
Balance under US GAAP                           $       511         $     248
                                                ==============================
Current portion of long-term debt
Balance under Canadian GAAP                     $       265         $     218
Variable interest entity adjustment (7)                   -                77
                                                ------------------------------
Balance under US GAAP                           $       265         $     295
                                                ==============================
Long-term debt and capital lease obligations
Balance under Canadian GAAP                     $     3,543         $   2,328
Variable interest entity adjustment (7)                  -              1,230
Convertible securities (6)                               22                 -
                                                ------------------------------
Balance under US GAAP                           $     3,565         $   3,558
                                                ==============================
Convertible preferred shares
Balance under Canadian GAAP                     $       148         $     132
Reclassification of preferred shares (6)               (148)             (132)
                                                ------------------------------
Balance under US GAAP                           $         -         $       -
                                                ==============================
Pension and other benefit liabilities
Balance under Canadian GAAP                     $     2,154         $   2,344
Minimum pension liability adjustment (4)                246                 2
                                                ------------------------------
Balance under US GAAP                           $     2,400         $   2,346
                                                ==============================


<PAGE>


                                                           Successor Company
                                                     December 31,   December 31,
                                                           2005          2004
Future income taxes
Balance under Canadian GAAP                              $   221     $     243
Goodwill (8)                                                  22             -
                                                         ---------------------
Balance under US GAAP                                    $   243     $     243
                                                         =====================

Other long-term liabilities
Balance under Canadian GAAP                              $ 1,399     $   1,520
Convertible preferred shares - embedded derivative (6)       165           180
Convertible notes - embedded derivative (6)                   64             -
Variable interest entity adjustment (7)                        -          (156)
                                                         ---------------------
Balance under US GAAP                                    $ 1,628     $   1,544
                                                         =====================

Minority interest
Balance under Canadian GAAP                              $   203     $       -
Variable interest entity adjustment (7)                        -           178
                                                         ---------------------
Balance under US GAAP                                    $   203     $     178
                                                         =====================

Temporary equity
Balance under Canadian GAAP                              $     -     $       -
Reclassification of convertible preferred shares (6)         182           167
                                                         ---------------------
Balance under US GAAP                                    $   182     $     167
                                                         =====================

Shareholders' equity

Balance under Canadian GAAP                              $ 1,168     $     203
Convertible securities (6)                                   (20)           (5)
Reclassification of convertible preferred shares and
convertible notes (6)                                       (209)         (117)
Variable interest entity adjustment (7)                       -            112
Goodwill recorded at fresh start (8)                       1,596         1,596
Current year income adjustments                              (48)          (68)
Current year adjustments for comprehensive income
    Minimum pension liability adjustment, net of tax
    of $82 (4)                                              (162)           (2)
    Available for sale securities, net of tax of $22 (11)    108
Cumulative prior year adjustments for:
     Future income tax                                        (2)            -
     Convertible securities                                  (99)            -
Comprehensive income
     Minimum pension liability adjustment (5)                 (2)            -
                                                         ---------------------
Balance under US GAAP                                    $ 2,330     $   1,719
                                                         =====================





<PAGE>

<TABLE>
<CAPTION>

                                                                                              Predecessor
                                                         Successor Company                      Company
                                                   Year ended            Period ended       Nine Months ended
                                                     December 31         December 31         September 30
                                                      2005                2004                   2004
                                                 -------------------------------------------------------------

Cash flows from (used for)

<S>                                                 <C>                 <C>                 <C>
Operating  - Canadian GAAP                          $     675           $    (426)          $      360

Addback: principal repayments on variable
interest entities and lease accounting                      -                  10                   59
                                                 ------------------------------------------------------------

Operating  - US GAAP                                      675                (416)                 419

Financing  - Canadian GAAP                                801               1,251                  253

Less: principal repayments on variable interest
entities and lease accounting                               -                 (10)                 (59)
                                                 ------------------------------------------------------------

Financing  - US GAAP                                      801               1,241                  194

Investing                                              (1,392)               (301)                (140)
                                                 ------------------------------------------------------------

Increase (decrease) in cash and cash equivalents           84                 524                  473

Cash and cash equivalents, beginning of period          1,481                   -                  484

Cash and cash equivalents transferred
  to the Successor Company                                  -                 957                 (957)
                                                 ------------------------------------------------------------

Cash and cash equivalents, end of period            $   1,565           $   1,481           $       -
                                                 ------------------------------------------------------------

</TABLE>


<PAGE>


1.   Aircraft Introduction Costs

Under Canadian GAAP, the Predecessor Company deferred and amortized aircraft
introduction costs. Under US GAAP, these costs are expensed as incurred. The
Corporation expenses aircraft introduction costs as incurred. Under Canadian
GAAP, the Predecessor Company recorded amortization expense of $5 for the nine
months ended September 30, 2004.

2.   Derivative Financial Instruments

Under US GAAP, all derivatives are recorded on the balance sheet at fair value.
The Corporation and Predecessor Company have elected not to designate any
derivatives as hedging instruments for US GAAP purposes and as such, changes in
the fair value of all derivative instruments are recorded in income.

Effective January 1, 2004 under Canadian GAAP, derivative instruments that are
not part of a designated hedging relationship are recorded at fair value, with
changes in fair value recognized currently in income. The opening deferred
credit related to the fair value adjustment of the Predecessor Company is
amortized over the life of the related derivative instruments. Under US GAAP,
this deferred credit is reversed to income. As a result of the application of
fresh start reporting, this deferred credit was valued at nil in the
Corporation.

As described in note 2, under Canadian GAAP, derivatives under the fuel-hedging
program are designated as hedges for accounting purposes and hedge accounting
is being applied prospectively from October 1, 2005. Under hedge accounting,
gains or losses on fuel hedging contracts are recognized in earnings as a
component of aircraft fuel expense when the underlying jet fuel being hedged is
used. The Corporation has elected not to designate any derivatives under the
fuel-hedging program as hedging instruments for US GAAP purposes and as such,
changes in the fair value of all derivative instruments are recorded in income.
The adjustment of $11 reflects recording of the fair value of outstanding
derivative contracts of $3 in favour of third parties and the write-off of the
asset recorded under Canadian GAAP of $8.

3.   Residual Value Guarantees under Operating Leased Aircraft

Under Canadian GAAP, the portion of the gain on sale-leasebacks that includes a
residual value guarantee is deferred until the end of the lease term for leases
entered into after September 1999, whereas under US GAAP, the amount would be
deferred until the end of the lease term for leases entered into after
September 1986. Further, under Canadian GAAP, the expected deficiency under a
residual value guarantee is accrued over the remaining lease term irrespective
of the end of lease term options for leases entered into after September 1999;
however, under US GAAP, the accrual of an expected deficiency is required for
leases entered into after September 1996. In the Corporation, all aircraft
lease agreements with residual value guarantees are consolidated under the
Variable Interest Entity adjustment described under note 2. The adjustment for
the nine months ended September 30, 2004 relates to the amortization of the
previous accrual of the residual value guarantee on renegotiated leases where
the residual value guarantee has been removed.

<PAGE>


4.   Employee Future Benefits

Under Canadian GAAP, if the accumulated benefit obligation related to employee
pensions exceeds the fair value of plan assets, a pension valuation allowance
is required to limit the pension asset to the amount that can be realized in
the future. A valuation allowance is not permitted under US GAAP. For defined
benefit plans, US GAAP requires the unfunded accumulated benefit obligation to
be recorded as additional minimum liability. The excess of the unfunded
accumulated benefit obligation over the unrecognized prior service cost is
recorded in other comprehensive income.

5.   Pre-operating Costs

Under Canadian GAAP, eligible pre-operating costs are deferred and amortized.
Under US GAAP, these costs are expensed as incurred. Under Canadian GAAP, the
Predecessor Company recorded amortization expense of $6 for the nine months
ended September 30, 2004. Under Canadian GAAP, all deferred pre-operating costs
were eliminated upon the application of fresh start reporting. No amounts have
been deferred under Canadian GAAP in ACE.

6.   Convertible Securities

Preferred Shares

Under Canadian GAAP, as described in note 12, the convertible preferred shares
issued in 2004 are presented as a compound instrument. At the date of issuance,
the value ascribed to the holder's conversion option, which is presented in
equity was $123 less allocated fees of $6; the value ascribed to the financial
liability was $127. Under US GAAP, the convertible preferred shares contain an
embedded derivative which has been reported separately as an other long-term
liability at its fair value of $165 as at December 31, 2005 ($180 as at
December 31, 2004). The convertible preferred shares were initially recorded at
$162 which is the proceeds received less direct costs of issuance and the fair
value of the embedded derivative, as of the date of issuance, and is included
in temporary equity as the conditions of redemption are not solely within the
control of the Corporation. The adjustment to deferred charges reflects
applying the direct costs of issuance, recorded in deferred charges under
Canadian GAAP, against the amount recorded in temporary equity.

For the convertible preferred shares, the changes in the fair value of the
embedded derivative are included in income and the accretion of the temporary
equity to the redemption value over the period to redemption is reflected as a
charge to retained earnings. The change in the fair value of the embedded
derivative includes the 5% accretion per annum on the convertible preferred
shares.

The adjustment reflects the reversal of interest expense under Canadian GAAP of
$17 (September 30, 2004 - nil; December 31, 2004 - $5); change in the fair
values of the embedded derivative amounted to a decrease of $15 (2004 -
increase of $104 in the Corporation, Predecessor - nil); and the amount charged
to retained earnings under US GAAP of $20 (2004 - $5 in the Corporation,
Predecessor - nil).

Convertible Notes

Under Canadian GAAP, as described in note 7, the convertible notes issued in
April 2005 are presented as a compound instrument. At the date of issuance, the
value ascribed to the holders' conversion option, which is presented as equity,
was $94 less allocated fees of $2; the value ascribed to the financial
liability was $236. Under US GAAP the convertible notes were initially recorded
at $260 which is the proceeds received before costs of issuance and the fair
value of the embedded derivative, as of the date of issuance, of $71. The
direct costs of issuance of $11 are recorded in deferred charges. The
adjustment also reflects the decrease to the liability related to the fair
value of the embedded derivative amounting to $7 and a reduction to interest
expense of $2.

<PAGE>


7.   Variable Interest Entities

As discussed in note 1, under Canadian GAAP, Accounting Guideline 15 -
Consolidation of Variable Interest Entities ("AcG-15") was adopted on January
1, 2005. There are no significant differences between AcG-15 and Interpretation
No. 46R - Consolidation of Variable Interest Entities ("FIN 46R") that affect
the Corporation's GAAP reconciliation. As a result, this reconciling difference
is no longer applicable.

The adjustment for the period ended December 31, 2004 of $33, reflects
depreciation expense of $24, interest expense of $24, a foreign exchange gain
of $53 and a non-controlling interest charge of $2 offset by the reversal of
aircraft rent expense of $30. The adjustment for the nine months ended
September 30, 2004 of $6, reflects depreciation expense of $73, interest
expense of $80, a foreign exchange gain of $30 and a non-controlling interest
charge of $5 offset by the reversal of aircraft rent expense of $134.

Upon the application of fresh start reporting, the assets and liabilities of
the VIEs consolidated by the Corporation were adjusted to fair value, resulting
in certain differences between the amounts reported by the VIE and the amounts
reported in the consolidated statement of financial position.


8.   Fresh Start Reporting and Goodwill

Under Canadian GAAP, the effects of the fresh start reporting adjustments,
including the settlement of the compromised debt, are accounted for as a
capital transaction and recorded within shareholders' equity. Under US GAAP,
the effect of the fresh start reporting adjustments, including the settlement
of the compromised debt, are reflected in the statement of operations.

Under Canadian GAAP, upon emergence from creditor protection, the identifiable
assets and liabilities of an enterprise are revalued based on the fair values
of such assets and liabilities in a manner similar to that used for a business
combination. The difference between the fair value of the Corporation's equity
over the fair value of the identifiable assets and liabilities is not permitted
to be recorded as an asset (goodwill) under Canadian GAAP. US GAAP does not
prohibit the recognition of goodwill to the extent that the reorganization
value exceeds the fair value of the specific tangible and identifiable
intangibles of the Corporation. The resulting goodwill under US GAAP is not
amortized and is subject to an impairment test on an annual basis or earlier if
an event occurs or circumstances change that would more likely than not reduce
of the fair value of the respective reporting unit below the carrying amount.

Under Canadian GAAP, the benefit of future income tax assets that exist at
fresh start, and for which a valuation allowance is recorded against, will be
recognized first to reduce to nil any remaining intangible assets (on a
pro-rata basis) that were recorded upon fresh start reporting with any
remaining amount as a credit to shareholders' equity. Under US GAAP the benefit
of future income tax assets that exist at fresh start will be recognized first
to reduce to nil any goodwill, then intangibles with any remaining amount taken
to income.

The adjustment for 2005 includes:
     o    a cumulative increase to intangible assets of $149, less
          amortization expense of $3;
     o    an increase to future income tax liabilities of $22;
     o    a cumulative reduction to goodwill of $144, including a goodwill
          impairment loss of $12 recorded during 2005 related to goodwill
          recorded in a reporting unit within the Transportation Services
          segment, and an Aeroplan dilution gain adjustment of $82 and tax
          adjustment of $22 as described further below;
     o    a reduction of future income tax expense of $19;
     o    a decrease to tax expense recorded in Other Comprehensive Income of
          $60; and
     o    a cumulative retained earnings adjustment of $(2).

For the period ended December 31, 2004, the Corporation recorded an increase of
$11 to intangibles, a reduction of $13 to goodwill and a tax expense of $2.

As described in note 13, under Canadian GAAP, ACE has recorded a dilution gain
of $190 as a result of the dilution of its interest in Aeroplan LP. Under US
GAAP, the dilution gain is reduced by $82 as a result of the 14.4% disposal of
the goodwill that was allocated to the Predecessor LP at fresh start reporting.
In addition, the future income tax expense of $28 as reported under Canadian
GAAP is reduced by $22 to $6 as a result of the disposal of goodwill. For US
GAAP purposes the dilution gain of $108 less tax of $6 is classified as an
extraordinary gain. Under US GAAP the calculation of earnings per share is
disclosed before extraordinary gains.


9.   Comprehensive Income

Under US GAAP, comprehensive income must be reported which is defined as all
changes in equity other than those resulting from investments by owners and
distributions to owners. Cumulative other comprehensive loss as at December 31,
2005 is $116 less net tax of $60 ($2 at December 31, 2004). For the periods
presented, under Canadian GAAP, the Predecessor and the Corporation were not
permitted to use the concept of comprehensive income. The adjustments to
cumulative other comprehensive income relate mainly to the minimum pension
liability adjustment described under item 4 and unrealized gains/losses on
available for sale securities described under item 10.

10.  Available-for-sale Securities

Under Canadian GAAP, portfolio investments are accounted for using the cost
method. Under US GAAP, portfolio investments classified as available-for-sale
securities are carried at market value with unrealized gains or losses
reflected as a separate component of shareholders' equity and included in
comprehensive income. Under US GAAP, an unrealized gain of $130 less tax of $22
has been recorded as a separate component of shareholders' equity and included
in comprehensive income, to reflect the fair value of the US Airways investment
of $217 at December 31, 2005.


<PAGE>


11.  Earnings per share

<TABLE>
<CAPTION>

                                                               Successor Company               Predecessor Company
                                                    Year ended            Period ended           Nine Months ended
                                                   December 31            December 31              September 30
                                             ----------------------------------------------------------------------
Numerator:                                             2005                   2004                   2004
                                             ----------------------------------------------------------------------

<S>                                               <C>                   <C>                      <C>
    Numerator for basic earnings per share:
     Income (loss)                                $     210             $      (53)              $   4,475
     Accretion of convertible preferred
     shares                                             (20)                    (5)                      -
     Settlement of convertible debentures                 -                      -                     125
                                             ----------------------------------------------------------------------
     Adjusted numerator for income (loss)
     per share                                          190                    (58)                  4,600
    Effect of potential dilutive securities:
     After tax income from:
     Convertible preferred shares                        11                      3                       -
     Convertible notes                                   15
     Convertible subordinated debentures                  -                      -                       -
    Add back anti-dilutive impact                       (15)                    (3)                      -
                                             ----------------------------------------------------------------------
Adjusted income (loss) for diluted earnings
per share                                         $     201             $      (58)              $   4,600
                                             ----------------------------------------------------------------------
Denominator:
    Denominator for basic earnings per
    share:
     Weighted-average shares                             98                     89                     120
                                              ---------------------------------------------------------------------
     Effect of potential dilutive
     securities:
        Stock options                                     1                      1                       -
        Convertible preferred shares                     10                      9                       -
        Convertible notes                                 5                      -                       -
        Class A non-voting preferred shares               -                      -                      10
        Convertible subordinated debentures               -                      -                       9
                                             ----------------------------------------------------------------------
                                                         16                     10                      19
     Add back anti-dilutive impact                       (5)                   (10)                      -
                                             ----------------------------------------------------------------------
Denominator for diluted earnings per share:
    Adjusted weighted-average shares                    109                     89                     139
                                             ----------------------------------------------------------------------
Basic earnings (loss) per share                   $    1.94             $    (0.65)              $   38.27
                                             ----------------------------------------------------------------------
Diluted earnings (loss) per share                 $    1.84             $    (0.65)              $   33.05
                                             ----------------------------------------------------------------------


Income (loss) per share before
extraordinary item (8) and cumulative
effect of change in accounting principle          $    0.90             $    (0.65)              $   39.75
Impact of:
    Extraordinary item (8)                             1.04                      -                      -
    Cumulative effect of change in
    accounting principle                                  -                      -                   (1.48)
                                             ---------------------------------------------------------------------
Income (loss) per share                           $    1.94             $    (0.65)              $   38.27

Income (loss) per share, assuming dilution,
before extraordinary item (8) and
cumulative effect of change in accounting
principle                                         $    0.88             $    (0.65)              $   34.32
Impact of:
    Extraordinary item (8)                             0.96                      -                       -
    Cumulative effect of change in
    accounting principle                                  -                      -                   (1.28)
                                             ---------------------------------------------------------------------
Income (loss) per share, assuming dilution        $    1.84             $    (0.65)              $   33.05

</TABLE>



12.  Supplementary Information under US GAAP

In the opinion of Management, the consolidated financial statements prepared in
accordance with Canadian GAAP and the US GAAP information included in this note
reflect adjustments, consisting of normal recurring accruals, except for
adjustments referred to above under FIN 46R - Consolidation of Variable
Interest Entities and Fresh Start Reporting, which are necessary to present
fairly the Corporation and Predecessor Company's financial position, results of
operations and cash flows for the periods indicated.

Fresh start reporting

Note 20 describes the impact of fresh start reporting under Canadian GAAP.

For US GAAP, it was determined that the Corporation's reorganization value was
$11,753 as at September 30, 2004. The reorganization value represents the fair
value of the entity before considering liabilities and approximates the amount
a willing buyer would pay for the assets of the entity immediately after the
plan of arrangement. The reorganization value does not include proceeds
received from new investors outlined in note 19. The reorganization value was
determined with reference to the value established under the Rights Offering.

The fair values of the consolidated assets and liabilities of the Corporation
have been based on Management's best estimates and on valuation techniques as
of September 30, 2004.

The effect of the Plan and other transactions on the Predecessor Company's
consolidated balance sheet, as of September 30, 2004, is outlined in the table
below and consists of the following components:

Plan of Arrangement:

     o    Extinguishment of compromised liabilities of approximately $7,981 by
          the issuance of common shares of the Corporation with a value of
          $925, resulting in a gain on extinguishment of debt in the amount
          $7,056 included in the statement of operations under US GAAP.

     o    Certain preferred shares with a carrying value of $125 were settled
          for a nominal amount resulting in a gain of $125 included as a
          credit to deficit.

     o    Exchange of the existing common shares of the Predecessor for new
          common stock of the Corporation resulting in a reduction of common
          stock by $817 and an increase in contributed surplus by $817.

Financing and Other Post-Emergence Transactions:

     o    The Rights Offering and Standby Purchase Agreement generated net
          proceeds of $852 in exchange for share capital. The Investment
          Agreement, as described in note 19, provided net cash proceeds of
          $238. As the convertible preferred shares include an embedded
          derivative, $76 was included in liabilities and $162 in temporary
          equity. Additional funds were received under the Exit Facility as
          described in note 19 under the Global Restructuring Agreement
          providing cash of $227, net of costs of $13. Implementation of
          components of the Global Restructuring Agreement (other than the
          Exit Financing) resulting in a net cash outlay of $323, issuance of
          additional debt amounting to $63, acquisition of aircraft for $64
          and settlement of certain obligations related to leases totalling
          $334. In addition, fees to the Corporation's advisors of $12 were
          paid on emergence.

<PAGE>


Fresh Start Reporting:

     o    Fresh start adjustments were recorded to reflect the fair values of
          assets and liabilities and the elimination of the contributed
          surplus and deficit. In the Predecessor Company, fresh start
          reporting resulted in a loss of $1,501 reported in income and a gain
          of $491 reported in comprehensive income.

<PAGE>

<TABLE>
<CAPTION>


                                            Air Canada                                                                      ACE
                                            Predecessor                                                                  Successor
                                             Company -                                                 Equity and     OtherCompany -
                                           September 30,          Plan of        Fresh Start          Financing       September 30,
                                               2004            Arrangement        Reporting          Transactions         2004
                                         -------------------------------------------------------------------------------------------
ASSETS

Current assets
<S>                                         <C>                <C>              <C>                   <C>             <C>
   Cash and cash equivalents                $       957        $       -        $         -           $      227      $     1,939
                                                                                                             852
                                                                                                             238
                                                                                                            (335)
   Restricted cash                                   62                -                  -                    -               62
   Accounts receivable                              723                -                  -                    -              723
   Spare parts, materials and supplies              190                -                 11                    -              201
   Prepaid expenses                                 129                -                 10                    -              139
                                            ------------       ----------       ------------          -----------      ----------

                                                  2,061                -                 21                  982            3,064

Property and equipment                            5,497                -               (456)                  64            5,105
Deferred charges                                  2,661                -             (2,526)                  13              148
Goodwill                                            220                -              1,376                    -            1,596
Intangible assets                                   158                -              2,521                    -            2,679
Other assets                                      1,166                -               (946)                   -              220
                                            ------------       ----------       ------------          -----------      ----------
TOTAL ASSETS                                $    11,763        $       -        $       (10)          $    1,059      $    12,812
                                            ------------       ----------       ------------          -----------      ----------

LIABILITIES

Liabilities not subject to compromise

  Current liabilities
   Accounts payable and accrued
   liabilities                              $     1,288        $       -        $        23           $        -      $     1,311
   Advance ticket sales and loyalty
   program deferred revenues                        861                -                268                    -            1,129
   Current portion of long-term debt
   and capital lease obligations                    558                -               (230)                   -              328
                                            ------------       ----------       ------------          -----------      ----------
                                                  2,707                -                 61                    -            2,768

  Long-term debt and capital lease
  obligations                                     2,777                -                726                  303            3,806
  Future income taxes                                 8                -                235                    -              243
  Pension and other benefit
  liabilities                                     2,036                -                332                    -            2,368
  Other long-term liabilities                     1,192                -                245                   76            1,513
  Minority Interest                                 344                -               (169)                   -              175
  Deferred credits                                  764                -               (430)                (334)               -
                                            ------------       ----------       ------------          -----------      ----------
                                                  9,828                -              1,000                   45           10,873

Liabilities subject to compromise                 7,981           (7,981)                 -                    -                -
                                            ------------       ----------       ------------          -----------      ----------
                                                 17,809           (7,981)             1,000                   45           10,873
                                            ------------       ----------       ------------          -----------      ----------

Temporary Equity                                    125             (125)                 -                  162              162

SHAREHOLDERS'  EQUITY

Share capital and other equity                      817              925               (792)                 852            1,777
                                                                     (25)
Contributed surplus                                  25              150               (175)                   -                -
Deficit                                          (6,522)           7,056               (534)                   -                -
Other Comprehensive Loss                           (491)                                491                    -                -
                                            ------------       ----------       ------------          -----------      ----------
                                                 (6,171)           8,106             (1,010)                 852            1,777
                                            ------------       ----------       ------------          -----------      ----------
TOTAL LIABILITIES AND
  SHAREHOLDERS' EQUITY                      $    11,763        $       -        $       (10)          $    1,059        $  12,812
                                            ------------       ----------       ------------          -----------      ----------


</TABLE>


<PAGE>

Accounts payable and accrued liabilities

The components of accounts payable and accrued liabilities at December 31 are
as follows:


                                            2005        2004
                                         ------------------------
Trade payables                            $   356     $   408
Accrued liabilities                           192         224
Payroll related liabilities                   508         404
Other                                         299         161
                                         ------------------------
                                          $ 1,355     $ 1,197
                                         ------------------------


Pension plans

Under US GAAP, the accrued benefit obligation for the defined benefit pension
plans as at December 31, 2005 is $11,959 (2004- $10,283).

Consolidated statement of operations

The components of depreciation, amortization and obsolescence for the periods
presented below are as follows:
<TABLE>
<CAPTION>


                                                                                                 Nine months
                                                    Year ended            Period ended              ended
                                                   December 31,           December 31,           September 30,
                                                       2005                  2004                   2004
                                              --------------------   -------------------    -------------------
<S>                                              <C>                    <C>                   <C>
Depreciation of tangible assets                  $     374              $     89              $     332
Amortization of intangible assets                       98                    17                     39
Obsolescence provision on spare parts
  materials and supplies                                13                     3                     14
                                              --------------------   -------------------    -------------------
                                                 $     485              $    109              $     385
                                              --------------------   -------------------    -------------------

</TABLE>


The components of other operating expenses for periods presented below are as
follows:

<TABLE>
<CAPTION>
                                                                                          Nine months
                                                                                             ended
                                              Year ended            Period ended          September 30,
                                          December 31, 2005       December 31, 2004          2004
                                           ----------------    --------------------    -------------------
<S>                                           <C>                   <C>                   <C>
Terminal handling and services                $     201             $     47              $     146
Building rent and maintenance                       125                   31                     93
Flight and cabin crew expense                       121                   28                     89
Credit card fees                                    158                   28                     97
Miscellaneous fees and services                     104                   22                     58
Advertising and promotion (a)                        75                   25                     70
Customer maintenance and materials                   82                   28                     55
Other                                               714                  149                    493
                                          -------------       --------------         --------------
                                              $   1,580             $    358             $    1,101
                                          -------------       --------------         --------------

</TABLE>


     a) Advertising and promotion costs are expensed when incurred.

Rent Expense

Rent expense, including aircraft rent, building and other equipment rentals,
amounts to $557 ($113 for the period ended December 31, 2004 under the
Corporation and $484 for the nine months ended September 30, 2004 under the
Predecessor Company)

Capital lease commitments

As at December 31, 2005, obligations under capital leases for future minimum
lease payments are as follows:


2006                                         $           240
2007                                                     263
2008                                                     248
2009                                                     151
2010                                                     142
Thereafter                                               945
                                            ----------------
Total minimum lease payments                           1,989
Less amount representing interest                       (624)
                                            ----------------
Total obligations under capital lease        $         1,365
                                            ----------------


<PAGE>


Valuation and Qualifying Accounts and Reserves

<TABLE>
<CAPTION>

                                                                       Additions
                                                     Balance at        charged to
                                                    Beginning of       costs and       Deductions/          Balance at end
                                                        Year           expenses         Other                 of Year
Allowance for obsolescence of spare parts,
materials and supplies
Predecessor Company nine months ended
<S>                                                  <C>               <C>            <C>                 <C>
   September 30, 2004                                 $     151         $     14       $    (165)          $       -
Successor Company three months ended
   December 31, 2004                                          -                3               -                   3
Successor Company  2005                               $       3         $     13       $       -           $      16

Allowance for uncollectible accounts
Predecessor Company nine months ended
   September 30, 2004                                 $      14         $     12       $      (9)          $      17
Successor Company three months ended
   December 31, 2004                                         17                2              (3)                 16
Successor Company  2005                               $      16         $      2       $      (5)          $      13

Future income tax valuation allowance
Predecessor Company nine months ended
   September 30, 2004                                 $   1,655         $    678       $       -           $   2,333
Successor Company three months ended
   December 31, 2004                                      2,333                1              -            $   2,334
Successor Company  2005                               $   2,334         $      -       $     (17)          $   2,317


</TABLE>

Upon the application of fresh start reporting, spare parts, materials and
supplies were adjusted to replacement cost.

New Accounting Policies

In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"). This standard replaces SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") and supersedes
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). It requires that the compensation cost of
share-based payment transactions be recognized in financial statements based on
the fair value of the equity or liability instruments issued. SFAS 123R is
effective for public companies beginning with the first annual period that
begins after June 15, 2005. The Corporation will adopt this statement as of the
beginning the first quarter 2006. The Corporation has not completed its
evaluation of the impact of SFAS 123R on its financial statements. Under
Canadian GAAP as described in note 2, the fair value of stock options granted
is recognized as a charge to salary and wage expense on a straight line basis
over the applicable vesting period, with an offset to contributed surplus. The
amount of compensation cost recognized at any date at least equals the value of
the vested portion of the options at that date. When stock options are
exercised, the

<PAGE>


consideration paid by employees, together with the amount in contributed
surplus, is credited to share capital.

13.      Aeroplan Dilution Gain Adjustment (unaudited)

During the course of preparing the annual 2005 consolidated financial
statements, it was noted that the Aeroplan gain calculation, as reported in the
three month period ended June 30, 2005, did not take into account the goodwill
that is allocated to Aeroplan. As a result the dilution gain for US GAAP
purposes, previously reported at $190 less tax of $28, has been decreased by
$60 to $108 less tax of $6.

As a result of this adjustment the interim periods in 2005 have been adjusted
as follows:
     o    The income for the three month period ended June 30, 2005,
          previously reported at $142, has been restated to $82.
     o    The income for the six month period ended June 30, 2005, previously
          reported at $46, has been restated to a loss of $14.
     o    The income for the nine month period ended September 30, 2005,
          previously reported at $370, has been restated to $310.

This adjustment does not impact the amounts reported under Canadian GAAP.

<PAGE>



24.  Subsequent Events

Jazz Air Income Fund

On February 2, 2006, the Jazz Air Income Fund ("the Fund") sold 23.5 million
units at a price of $10 per unit for net proceeds of approximately $222. The
Fund is an unincorporated, open-ended trust created to indirectly acquire and
hold 19.1% of the outstanding limited partnership units of Jazz. ACE holds the
remaining 80.9% of the outstanding limited partnership units of Jazz LP.

The Fund has granted to the underwriters an over-allotment option (the
"Over-Allotment Option"), exercisable for a period of 30 days following the
Closing Date, to purchase up to 3.525 million additional units at $10 per unit
for net proceeds of $33. In the event the underwriters exercise the
Over-Allotment Option in full, the Fund and ACE will hold 22% and 78% of the
outstanding limited partnership units of the Jazz LP respectively.

Pursuant to the limited partnership agreement, 20% of Jazz's limited
partnership units are subordinated by ACE in favour of the Fund until December
31, 2006. Distributions on the subordinated units will only be paid by Jazz to
the extent that Jazz has met and paid its distributable cash target to the Fund
as the holder of non-subordinated units.

In connection with the offering, the establishment of $150 senior secured
syndicated credit facilities was completed. On closing of the offering, $115
was drawn under the credit facilities. The facility bears interest at floating
rates and has a three year term.

Non-unionized Labour Reductions

In February, 2006 the Corporation announced that certain ACE companies will
proceed with the reduction of non-unionized staffing levels by 20%. The
non-unionized staff reductions are expected to take place primarily at Air
Canada, Air Canada Cargo, ACGHS, and ACTS. The costs of this program will be
recorded during the first quarter 2006 once the details of the plan are
finalized.



<PAGE>


                                                                  Document No. 3


<PAGE>





                           ACE Aviation Holdings Inc.


                               [GRAPHIC OMITTED]



-------------------------------------------------------------------------------


                                      2005

                      MANAGEMENT'S DISCUSSION AND ANALYSIS

                OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

                     For the period ended December 31, 2005


-------------------------------------------------------------------------------



FEBRUARY 9, 2006

<PAGE>
<TABLE>
<CAPTION>


                                                    TABLE OF CONTENTS

<S>    <C>                                                                                                       <C>
1.     PREFACE....................................................................................................1
2.     EXPLANATORY NOTES..........................................................................................3
            2.1.     Glossary of Terms............................................................................3
            2.2.     Seasonality..................................................................................3
            2.3.     Non-GAAP Financial Measures..................................................................4
            2.4.     Aeroplan Loyalty Program.....................................................................8
3.     OVERVIEW AND GENERAL BUSINESS SUMMARY......................................................................9
4.     CONSOLIDATED RESULTS OF OPERATIONS - FOURTH QUARTER ANALYSIS..............................................16
            4.1.     Comparison of Results - Fourth Quarter 2005 versus Fourth Quarter 2004......................17
            4.2.     Revenue Performance - Fourth Quarter 2005 versus Fourth Quarter 2004........................19
            4.3.     Cost Performance - Fourth Quarter 2005 versus Fourth Quarter 2004...........................22
5.     CONSOLIDATED RESULTS OF OPERATIONS - 2005 VERSUS 2004 COMBINED............................................25
            5.1.     Performance at a Glance.....................................................................25
            5.2.     Comparison of Results - 2005 versus 2004 Combined...........................................29
            5.3.     Revenue Performance - 2005 versus 2004 Combined.............................................31
            5.4.     Cost Performance - 2005 versus 2004 Combined................................................36
6.     THE STATEMENT OF FINANCIAL POSITION AND LIQUIDITY.........................................................40
            6.1.     Share Capital and Other Equity..............................................................41
            6.2.     Liquidity and Working Capital...............................................................42
            6.3.     Debt and Lease Obligations..................................................................43
            6.4.     Capital Expenditures........................................................................44
            6.5.     Pension Funding Obligations.................................................................47
7.     FINANCIAL MANAGEMENT - 2005 VERSUS 2004 COMBINED..........................................................48
            7.1.     Cash Flows from (used for) Operations.......................................................49
            7.2.     Cash Flows from (used for) Financing Activities.............................................50
            7.3.     Cash Flows from (used for) Investing Activities.............................................51
8.     FLEET.....................................................................................................52
9.     PEOPLE....................................................................................................54
10.    QUARTERLY FINANCIAL DATA..................................................................................56
11.    SEGMENT INFORMATION.......................................................................................57
            11.1.    Analysis of Results - Fourth Quarter 2005 versus Fourth Quarter 2004........................60
12.    OFF-BALANCE SHEET ARRANGEMENTS............................................................................63
13.    CHANGES IN ACCOUNTING POLICIES............................................................................66
14.    CRITICAL ACCOUNTING ESTIMATES.............................................................................68
15.    SENSITIVITY OF CONSOLIDATED RESULTS.......................................................................74
16.    RISK FACTORS..............................................................................................75
            16.1.    Risks Relating to the Corporation...........................................................75
            16.2.    Risks Relating to the Industry..............................................................81
17.    CONTROLS AND PROCEDURES...................................................................................88
            17.1.    Disclosure Controls and Procedures..........................................................88
            17.2.    Internal Controls over Financial Reporting..................................................88
18.    OUTLOOK...................................................................................................89
19.    SUBSEQUENT EVENTS.........................................................................................92
            19.1.    Jazz Air Income Fund........................................................................92
            19.2.    Non-unionized Labour Reductions.............................................................92
</TABLE>

<PAGE>

1.    PREFACE

         ACE Aviation Holdings Inc. (ACE), incorporated on June 29, 2004, is
the parent holding company, directly or indirectly, of various transportation
and other service companies and partnerships including the following principal
operating companies and partnerships: Air Canada, AC Cargo Limited Partnership
(Air Canada Cargo), ACGHS Limited Partnership (ACGHS), Touram Limited
Partnership (Air Canada Vacations), Jazz Air LP (Jazz or Jazz LP), and ACTS
Limited Partnership (ACTS). In addition, the Corporation holds an 85.6 per cent
ownership in Aeroplan Limited Partnership (Aeroplan or Aeroplan LP).

         Reference to "Corporation" in this Management Discussion and Analysis
(MD&A) refers to, as the context may require, ACE and its subsidiaries
collectively, ACE and one or more of its subsidiaries, one or more of ACE's
subsidiaries, or ACE itself.

         This MD&A is current as of February 9, 2006.

         On September 30, 2004, Air Canada and certain subsidiaries emerged
from creditor protection under the provisions of the Companies' Creditors
Arrangement Act (Canada) (CCAA). Reference to "Predecessor Company" refers to
Air Canada and its subsidiaries prior to September 30, 2004. In accordance with
Section 1625 of the Canadian Institute of Chartered Accountants (CICA)
Handbook, Comprehensive Revaluation of Assets and Liabilities (CICA 1625),
prior period financial information has not been restated to reflect the impact
of fair value adjustments and, accordingly, certain amounts in the Predecessor
Company's results are not directly comparable to those of the Corporation.

         The consolidated financial statements are expressed in millions of
Canadian dollars and are prepared in accordance with Generally Accepted
Accounting Principles (GAAP) in Canada. The accounting policies of ACE are
consistent with those of the Predecessor Company, with the exception of the
fair value adjustments applied under fresh start reporting and certain
accounting policies as outlined in Note 2 to the 2005 Annual Consolidated
Financial Statements of ACE.

         The consolidated statement of operations and the consolidated
statement of cash flow for the three months ended December 31, 2005 and for the
three months ended December 31, 2004 both reflect the results of operations of
the Corporation. Consequently, the financial information for the fourth quarter
of 2005 is directly comparable to that of the fourth quarter of 2004 with the
exception of the adoption of Accounting Guideline 15 - Consolidation of
Variable Interest Entities (AcG-15) on January 1, 2005, as further described in
Note 2 to the 2005 Annual Consolidated Financial Statements of ACE. The
consolidated statement of financial position as of December 31, 2005 and
December 31, 2004 represents the accounts of the Corporation.


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ACE Aviation Holdings Inc.                                               Page 1
2005 Management's Discussion and Analysis

<PAGE>

         The consolidated statement of operations and the consolidated
statement of cash flow for the year ended December 31, 2005 reflect the results
of the Corporation. The consolidated statement of operations and the
consolidated statement of cash flow for the nine months ended September 30,
2004 reflect the results of the Predecessor Company; the consolidated statement
of operations and the consolidated statement of cash flow for the period from
the incorporation of ACE to December 31, 2004 reflect the results of the
Corporation. Refer to the section entitled "Non-GAAP Financial Measures" on
page 4 of this MD&A for additional information on the 2004 results of
operations.

         For further information on ACE's and Air Canada's public disclosure
file, including ACE's Annual Information Form, please consult SEDAR at
www.sedar.com.

CAUTION REGARDING FORWARD-LOOKING INFORMATION

         ACE's communications often contain written or oral forward-looking
statements which are included in the MD&A and may be included in filings with
securities regulators in Canada and the United States. These forward-looking
statements are identified by the use of terms and phrases such as "anticipate",
"believe", "could", "estimate", "expect", "intend", "may", "plan", "predict",
"project", "will", "would", and similar terms and phrases, including references
to assumptions. Such statements may involve but are not limited to comments
with respect to strategies, expectations, planned operations or future actions.

         Forward-looking statements, by their nature, are based on assumptions
and are subject to important risks and uncertainties. Any forecasts or
forward-looking predictions or statements cannot be relied upon due to, amongst
other things, changing external events and general uncertainties of the
business. Results indicated in forward-looking statements may differ materially
from actual results for a number of reasons, including without limitation,
energy prices, general industry, market and economic conditions, war, terrorist
attacks, changes in demand due to the seasonal nature of the business, the
ability to reduce operating costs and employee counts, employee relations,
labour negotiations or disputes, restructuring, pension issues, currency
exchange and interest rates, changes in laws, adverse regulatory developments
or proceedings, pending litigation and actions by third parties as well as the
factors identified throughout this MD&A and, in particular, those identified in
the Risk Factors section to this MD&A. The forward-looking statements contained
in this discussion represent ACE's expectations as of February 9, 2006, and are
subject to change after such date. However, ACE disclaims any intention or
obligation to update or revise any forward-looking statements whether as a
result of new information, future events or otherwise.


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ACE Aviation Holdings Inc.                                               Page 2
2005 Management's Discussion and Analysis

<PAGE>

2.   EXPLANATORY NOTES

2.1.   Glossary of Terms

Revenue Passenger Miles (RPMs)
------------------------------
Revenue Passenger Miles is a measure of passenger traffic calculated by
multiplying the total number of revenue passengers carried by the miles they
are carried.

Available Seat Miles (ASMs)
---------------------------
Available Seat Miles is a measure of passenger capacity calculated by
multiplying the total number of seats available for revenue traffic by the
miles flown.

Passenger Load Factor
---------------------
Passenger Load Factor is a measure of passenger capacity utilization derived by
expressing revenue passenger miles as a percentage of available seat miles.

Passenger Revenue per Revenue Passenger Mile (yield)
----------------------------------------------------
Average passenger revenue per revenue passenger mile.

Passenger Revenue per Available Seat Mile (RASM)
------------------------------------------------
Average passenger revenue per available seat mile.

"Subsidiary" or "subsidiaries" refers to, in relation to ACE, any entity,
including a corporation or a limited partnership, which is controlled, directly
or indirectly, by ACE.

2.2.     Seasonality

         The Corporation has historically experienced considerably greater
demand for its services in the second and third quarters of the calendar year
and significantly lower demand in the first and fourth quarters of the calendar
year. This demand pattern is principally a result of the high number of leisure
travelers and their preference for travel during the spring and summer months.
The Corporation has substantial fixed costs that do not meaningfully fluctuate
with passenger demand in the short-term.

-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                               Page 3
2005 Management's Discussion and Analysis

<PAGE>


2.3.  Non-GAAP Financial Measures
Annual Supplementary Non-GAAP Combined Information for the year 2004

         The Annual Supplementary Non-GAAP Combined Information for the year
2004 is the combination of financial results for the nine months ended
September 30, 2004 of the Predecessor Company and financial results for the
period ended December 31, 2004, which represents three months of operations, of
the Corporation. Such combination is for illustrative purposes only. This
combined information will hereinafter be referred in this MD&A as "Combined"
information or "2004 Combined". As a result of the application of fresh start
reporting, application of new accounting policies, the effectiveness of certain
lease contracts on emergence from CCAA and the debt and equity transactions
that occurred on September 30, 2004, the Corporation's financial statements are
not directly comparable to those prepared for the Predecessor Company prior to
the emergence. The combination of the financial information of Air Canada and
ACE for the year ended December 31, 2004 should not be viewed as a continuum
because the financial statements of Air Canada for periods prior to October 1,
2004 and the financial statements of ACE for the period ended December 31, 2004
are those of different reporting entities and are prepared using different
bases of accounting and different accounting policies and are therefore not
directly comparable.

<TABLE>
<CAPTION>

                                     2004 Combined Income Statement
                                     ------------------------------
---------------------------------------------------------------------------------------------------------
                                                     ACE                Air Canada
                                              Three months ended     Nine months ended         2004
($ millions)                                  December 31, 2004     September 30, 2004       Combined
                                             -----------------------------------------------------------
<S>                                                        <C>                    <C>            <C>
Operating Revenues
Passenger                                                  1,681                  5,628          7,309
Cargo                                                        151                    405            556
Other                                                        230                    805          1,035
                                             -----------------------------------------------------------
                                                           2,062                  6,838          8,900
                                             -----------------------------------------------------------
Operating Expenses
Salaries, wages and benefits                                 596                  1,989          2,585
Aircraft fuel                                                432                  1,174          1,606
Aircraft rent                                                111                    521            632
Other                                                        926                  3,034          3,960
                                             -----------------------------------------------------------
                                                           2,065                  6,718          8,783
                                             -----------------------------------------------------------
Operating income (loss) before
restructuring and reorganization items                        (3)                  120            117
  Reorganization and restructuring items                       -                  (871)          (871)
  Non-operating expense                                      (47)                 (246)          (293)
  Foreign exchange gain                                       78                   104            182

Provision for income taxes                                   (13)                   (2)           (15)
                                             -----------------------------------------------------------
Income (loss) for the period                                  15                  (895)          (880)
                                             ===========================================================

---------------------------------------------------------------------------------------------------------
</TABLE>



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ACE Aviation Holdings Inc.                                               Page 4
2005 Management's Discussion and Analysis

<PAGE>
<TABLE>
<CAPTION>


                                           2004 Combined Statement of Cash Flow
                                           ------------------------------------
--------------------------------------------------------------------------------------------------------------------------
                                                                                        Predecessor
     ($ millions)                                                       ACE               Company
                                                                   -------------------------------------------------------
                                                                     Three Months       Nine months
                                                                        ended              ended
                                                                     December 31,      September 30,
Cash flows from (used for)                                               2004              2004          2004 Combined
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>             <C>               <C>

Operating
   Income (loss) for the period                                               15              (895)             (880)

   Adjustments to reconcile to net cash provided by operations:
     Reorganization and restructuring items                                    -               786               786
     Depreciation, amortization and obsolescence                              85               312               397
     Loss on sale of and provisions on assets                                  -                75                75
     Foreign exchange                                                        (98)             (104)             (202)
     Future income taxes                                                      11                (5)                6
     Employee future benefit funding (more than) less than expense           (52)              126                74
     Decrease (increase) in accounts receivable                              269              (191)               78
     Decrease (increase) in spare parts, materials & supplies                (30)                -               (30)
     Increase (decrease) in accounts payable & accrued liabilities          (256)               34              (222)
     Increase (decrease) in advance ticket sales, net of restricted cash     (77)              196               119
     Aircraft lease payments in excess of rent expense                       (14)              (31)              (45)
     Other                                                                    35                57                92
                                                                        --------------------------------------------------
   Cash flows from (used for) operating activities before the
   following items:                                                         (112)              360               248
     Settlement of lease obligations                                        (290)                -              (290)
     Rebate on lease settlement                                               33                 -                33
     Payment of restructuring obligation                                     (45)                -               (45)
     Fees conditional on emergence                                           (12)                -               (12)
                                                                        --------------------------------------------------
                                                                            (426)              360               (66)
                                                                        --------------------------------------------------

Financing
     Issue of share capital                                                    1                 -                 1
     Aircraft-related borrowings                                               -               233               233
     Credit facility borrowings                                                -                80                80
     Reduction of long-term debt and capital lease obligations               (67)             (358)             (425)
     Preferred shares issued to Cerberus for cash                            238                 -               238
     Shares issued for cash under rights offering                            852                 -               852
     GE DIP financing                                                       (300)              300                 -
     Drawdown of Exit Financing                                              527                 -               527
     Other                                                                     -                (2)               (2)
                                                                        --------------------------------------------------
                                                                           1,251               253             1,504
                                                                        --------------------------------------------------
Investing
     Short-term investments                                                 (151)              186                35
     Additions to capital assets                                            (129)             (328)             (457)
     Proceeds from sale of assets                                              -                 2                 2
     Cash collateralization of letters of credit                             (21)                -               (21)
                                                                        --------------------------------------------------
                                                                            (301)             (140)             (441)
                                                                        --------------------------------------------------

Increase in cash and cash equivalents                                        524               473               997
Cash and cash equivalents, beginning of period                                 -               484               484
Cash and cash equivalents, transferred to the Corporation                    957              (957)                 -
                                                                        --------------------------------------------------
Cash and cash equivalents, end of period                                   1,481                 -             1,481
                                                                       ===================================================

---- ---------------------------------------------------------------------------------------------------------------------
</TABLE>


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ACE Aviation Holdings Inc.                                               Page 5
2005 Management's Discussion and Analysis

<PAGE>


EBITDAR

         EBITDAR (earnings before interest, taxes, depreciation, amortization
and obsolescence and aircraft rent) is a non-GAAP financial measure commonly
used in the airline industry to view operating results before aircraft rent and
depreciation, obsolescence and amortization, as these costs can vary
significantly among airlines due to differences in the way airlines finance
their aircraft and other assets.

         EBITDAR is not a recognized measure for financial statement
presentation under GAAP and does not have a standardized meaning and is
therefore not likely to be comparable to similar measures presented by other
public companies. EBITDAR, before reorganization and restructuring items, is
reconciled to operating income (loss) before reorganization and restructuring
items, as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                    ACE               ACE                          ACE            Combined
-------------------------------------------------------------------------------------------------------------------------
                                                                               Twelve Months     Twelve Months
                                Three Months     Three Months         $           ended             ended            $
                               ended December   ended December     Change       December 31,      December 31,    Change
($ millions)                      31, 2005         31, 2004                        2005             2004
                              ----------------- ---------------- ---------- ----------------- ---------------- ----------
<S>                 <C>                   <C>               <C>       <C>               <C>              <C>        <C>
GAAP operating income
before reorganization and
restructuring items (1)                   (35)              (3)       (32)              452              117        335
Add back:
Aircraft rent                             117              111          6               417              632       (215)
Depreciation, amortization
and obsolescence                          125               85         40               482              397         85
                              ----------------- ---------------- ---------- ----------------- ---------------- ----------

EBITDAR, before
reorganization and
restructuring items (1)                   207              193         14             1,351            1,146        205

EBITDAR margin (%) (2)                    8.8              9.4     (0.6)pp             13.7             12.9     0.8 pp
----------------------------- ----------------- ---------------- ---------- ----------------- ---------------- ----------
</TABLE>

(1) Reorganization and restructuring items were recorded while the Predecessor
Company was under creditor protection from April 1, 2003 through to September
30, 2004. As the Corporation emerged from CCAA proceedings on September 30,
2004, reorganization and restructuring items were not recorded after that date.

(2) EBITDAR margin is calculated as EBITDAR divided by operating revenues.




-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                               Page 6
2005 Management's Discussion and Analysis

<PAGE>
<TABLE>
<CAPTION>


EBITDAR by Segment
------------------

-----------------------------------------------------------------------------------------------------------------------
                                                        Three Months ended December 31, 2005
                              -----------------------------------------------------------------------------------------
($ millions)                   Transportation                                              Inter-Segment       ACE
                                  Services        Aeroplan        Jazz          ACTS       Elimination    Consolidated
-----------------------------------------------------------------------------------------------------------------------

<S>                                       <C>            <C>           <C>           <C>          <C>          <C>
GAAP operating income                    (91)           30            34            (8)           -           (35)
Add back:
Aircraft rent                             90             -            28             -           (1)          117
Depreciation, amortization
and obsolescence                         110             3             4             8            -           125
                              -----------------------------------------------------------------------------------------
EBITDAR                                  109            33            66             0           (1)          207
-----------------------------------------------------------------------------------------------------------------------



-----------------------------------------------------------------------------------------------------------------------
                                                        Three Months ended December 31, 2004
                              -----------------------------------------------------------------------------------------
($ millions)                   Transportation                                              Inter-Segment       ACE
                                  Services        Aeroplan        Jazz          ACTS       Elimination    Consolidated
-----------------------------------------------------------------------------------------------------------------------

GAAP operating income                    (58)           22            22             11               -           (3)
Add back:
Aircraft rent                            103             -             9              -              (1)         111
Depreciation, amortization
and obsolescence                          73             1             4              7               -           85
                              -----------------------------------------------------------------------------------------
EBITDAR                                  118            23            35             18              (1)         193
-----------------------------------------------------------------------------------------------------------------------



-----------------------------------------------------------------------------------------------------------------------
                                                       Twelve Months ended December 31, 2005
                              -----------------------------------------------------------------------------------------
($ millions)                   Transportation                                              Inter-Segment       ACE
                                  Services        Aeroplan        Jazz          ACTS       Elimination    Consolidated
-----------------------------------------------------------------------------------------------------------------------

GAAP operating income                    174           102           129             47               -          452
Add back:
Aircraft rent                            343             -            80              -              (6)         417
Depreciation, amortization
and obsolescence                         424             8            18             32               -          482
                              -----------------------------------------------------------------------------------------
EBITDAR                                  941           110           227             79              (6)       1,351
-----------------------------------------------------------------------------------------------------------------------
</TABLE>



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ACE Aviation Holdings Inc.                                               Page 7
2005 Management's Discussion and Analysis

<PAGE>

2.4.  Aeroplan Loyalty Program

         As a result of the application of fresh start reporting, the
outstanding loyalty program mileage credits (Miles) were adjusted to reflect
the estimated fair value of Miles to be redeemed in the future. As a
consequence of this fair value adjustment and the evolving nature of the
Aeroplan loyalty program, the Corporation changed the accounting policy
effective September 30, 2004 for the recognition of its obligations relating to
the loyalty program. The Predecessor Company recognized the obligation related
to Miles earned through transportation services based on the incremental cost
of providing future transportation services. On a prospective basis from the
date of fresh start reporting, Miles earned by members through transportation
services provided by the Corporation and the transportation services are
treated as multiple elements. Miles are recorded at fair values with the
residual allocated to transportation services. Consistent with the accounting
policy of the Predecessor Company, the proceeds from the sale of Miles to
loyalty program partners are deferred.

         Effective September 30, 2004, Miles redeemed for travel on Air Canada
and Jazz are included in the Passenger revenue category and Miles redeemed for
other than travel are included in the Other revenue category. Under the
accounting policy in the Predecessor Company, Aeroplan redemption revenues from
Miles earned by members through loyalty program partners were included in the
Other revenue category.

         The net of passenger revenues from Miles redeemed for travel on Air
Canada and Jazz and the reduction to passenger revenues for the fair value of
Miles issued on qualifying travel on Air Canada and Jazz is referred to as
"Aeroplan passenger revenues" in this MD&A. The following table summarizes the
amounts recorded under the current and previous accounting policies:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------

     ($ millions)                                                           2005             2004
                                                                   ------------------------------------
<S>                                                                          <C>              <C>
ACE Accounting Policy

Aeroplan Miles redeemed for travel on Air Canada and Jazz
     Miles earned through air transportation services                        164              30
     Miles earned through loyalty program partners                           305              54
                                                                   ------------------------------------
                                                                             469              84
Less the deferral of the fair value of Miles issued                         (179)            (43)
                                                                   ------------------------------------
Net recorded in Passenger revenue                                            290              41
                                                                   ====================================

Predecessor Company Accounting Policy


Miles earned through loyalty program partners and redeemed for
travel on Air Canada and Jazz (recorded in Other revenue).                     -             173
-------------------------------------------------------------------------------------------------------
</TABLE>



-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                               Page 8
2005 Management's Discussion and Analysis
<PAGE>



3.  OVERVIEW AND GENERAL BUSINESS SUMMARY

         ACE is the parent holding company of Air Canada and ACE's other
subsidiaries.

[SUBSIDIARY GRAPHIC: Air Canada; Aeroplan; Air Canada Cargo; Air Canada Ground
Handling Services; Air Canada Vacations; ACTS; Air Canada Jazz]


         Air Canada is Canada's largest domestic and international full-service
airline and the largest provider of scheduled passenger services in the
domestic market, the US transborder market and each of the Canada Europe,
Canada Pacific, Canada Caribbean/Central America and Canada South America
markets. Passenger transportation is the principal business of the Corporation
and, in 2005, represented 84 per cent of its total operating revenues.

         Air Canada and Jazz, the Corporation's regional carrier, operate an
extensive domestic, US transborder and international network. During 2005, Air
Canada and Jazz operated, on average, approximately 1,200 scheduled flights
each day and carried over 30 million passengers. In 2005, Air Canada and Jazz
provided direct passenger air transportation to 159 destinations and, through
commercial agreements with other unaffiliated regional airlines referred to as
Tier III carriers, to an additional 11 destinations, for a total of 170 direct
destinations on five continents. The Corporation's primary hubs are located in
Toronto, Montreal, Vancouver and Calgary. In 2005, an independent survey by
Skytrax of more than 12 million international air travelers ranked Air Canada
as the Best Airline in North America.

         Air Canada also operates an extensive global network in conjunction
with its international partners. Air Canada is a founding member of the Star
Alliance network, the world's largest airline alliance group. The Star Alliance
network has grown, since its inception, to include 16 members and three
regional members. Through its strategic and commercial arrangements with Star
Alliance members and several other airlines, Air Canada offers service to over
795 destinations in 139 countries, with reciprocal participation in frequent
flyer programs and use of airport lounges.




-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                               Page 9
2005 Management's Discussion and Analysis

<PAGE>

         The Corporation has a controlling interest in Aeroplan which operates
Canada's premier loyalty program. Aeroplan provides its commercial partners
with loyalty marketing services designed to attract and retain customers and
stimulate demand for such partners' products and services. Aeroplan's objective
is to offer its commercial partners superior value relative to other marketing
alternatives through access to Aeroplan's base of members and the design and
execution of marketing programs aimed at increasing revenue, market share, and
customer loyalty. The Aeroplan program is one of Canada's longest standing
loyalty programs. It was founded in 1984 by Air Canada to manage the airline's
frequent flyer program. Aeroplan benefits from its unique strategic
relationship with Air Canada in addition to its contractual arrangements with
leading commercial partners including AMEX, Bell Canada, CIBC, Future Shop,
Imperial Oil (Esso), Star Alliance member airlines and numerous hotel chains
and car rental companies.

         Aeroplan offers its approximately five million active members the
ability to accumulate Aeroplan Miles throughout its partner network through
purchases of products and services. Aeroplan sells Aeroplan Miles to its
extensive network of over 60 commercial partners, representing over 100 brands
in the financial services, travel services and consumer products and services
industries. Today, financial services partners generate the majority of
Aeroplan's revenues.

         Jazz is the largest regional airline and the second largest airline in
Canada after Air Canada, based on fleet size and number of routes operated.
Jazz forms an integral part of Air Canada's domestic and US transborder market
presence and strategy. Jazz and Air Canada are parties to a capacity purchase
agreement (CPA) effective September 30, 2004, pursuant to which Air Canada
currently purchases substantially all of Jazz's fleet capacity based on
predetermined rates. Under the CPA with Air Canada, Jazz provides service to
and from lower density markets as well as higher density markets at off-peak
times throughout Canada and to and from certain destinations in the United
States. Jazz currently operates scheduled passenger service on behalf of Air
Canada, with approximately 688 departures per weekday to 56 destinations in
Canada and 17 destinations in the United States with an operating fleet of 121
aircraft as of December 31, 2005. Jazz and Air Canada have linked their
regional and mainline networks in order to serve connecting passengers more
efficiently and to provide valuable traffic feeds to Air Canada's mainline
routes.

         The Corporation also provides technical services through ACTS. ACTS is
a full-service Maintenance, Repair and Overhaul (MRO) organization that
provides airframe, engine and component maintenance and various ancillary
services to a wide range of more than 100 global customers. ACTS operates
maintenance centers across Canada, with principal centers located in Montreal,
Toronto, Winnipeg and Vancouver.

         The Corporation also provides cargo services through Air Canada Cargo;
ground handling services through ACGHS; and tour operator services and leisure
vacation packages through Air Canada Vacations.



-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                               Page 10
2005 Management's Discussion and Analysis

<PAGE>

Business Strategy

         In order to respond to a rapidly changing landscape, the Corporation
has fundamentally changed its business strategy and has been redesigning its
business processes since emergence from CCAA. ACE designed and embarked on a
new business plan to: (i) consolidate its domestic market position through a
superior product offering at a competitive cost; (ii) provide a sustainable
foundation for its growing international markets; and (iii) highlight the value
inherent in ACE's subsidiaries. The Corporation's new business strategy is
based on the following four major components:

(i)    a competitive cost structure;
(ii)   a redesigned network to maximize efficiency and leverage international
       growth opportunities;
(iii)  a new revenue model for passenger services; and
(iv)   a new corporate structure to facilitate the implementation of strategic
       initiatives and to surface the value of its subsidiaries.

Competitive Cost Structure

The Corporation's new business strategy is built on a significantly improved
competitive cost structure. During the CCAA restructuring process and since
emerging from the process, the following three main focus areas have
contributed significantly to the Corporation's benefit:

(i)    Through the CCAA restructuring process, the Corporation dramatically
       reduced its operating costs.

(ii)   Following this, the Corporation embarked on a substantial re-engineering
       process to simplify its internal processes and reduce its costs even
       further by eliminating non-value adding tasks and procedures. This is an
       ongoing process of continuous improvement.

(iii)  Additionally, the Corporation has created a new business model whereby
       its customers can be served directly using web-enabled technology which
       is envisaged to further eliminate substantial external non-value adding
       processes between the Corporation and its customers. This too is an
       ongoing process of continuous improvement.

       Stemming from the above focus areas, the Corporation has realized and
envisages continuing to benefit from substantial cost reductions in the
following areas:

(i)    substantially reduced supplier obligations, including aircraft and real
       estate;

(ii)   significantly improved labour productivity due to a rationalized work
       force and lower average salaries;

(iii)  lower trip costs due to better matching of capacity with demand;

(iv)   higher operating efficiencies through its fleet modernization program;

(v)    lower pilot training, inventory carrying and maintenance costs by
       reducing the number of aircraft types;

(vi)   significantly lower sales and distribution costs by improved and easy to
       use web-enabled technology for its customers;

(vii)  dramatically lower internal costs by eliminating business processes
       which do not fit the new revenue model.


-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                               Page 11
2005 Management's Discussion and Analysis
<PAGE>

         Unlike its low-cost competitors, the Corporation incurs costs related
to the offer of value-added transportation services, such as Executive Class
services and other non-air services. The Corporation believes that these costs
are offset by a revenue premium, driven primarily by higher passenger yield and
passenger load factor, increased international connecting traffic and increased
Aeroplan and cargo revenues. The Corporation expects to maintain this revenue
premium by continuing to leverage its key competitive advantages, including:

(i)      a more extensive route network, greater flight frequency and greater
         market presence;
(ii)     value-added services, for which customers are willing to pay a
         premium, including unlimited schedule changes, same day stand by,
         advance seat selection, full Aeroplan mileage, concierge service and
         Executive Class service; and
(iii)    higher yielding international (including US transborder) connections.

Redesigned Network to Maximize Efficiency and Leverage International Growth
Opportunities

         The Corporation's objective is to become the customer's clear choice
in all the markets in which it competes by offering a better scheduled product
at a competitive price. To this end, the Corporation's redesigned network
focuses on offering better flight frequencies on key domestic and US
transborder routes, while maintaining competitive frequency on other domestic
and US transborder routes, and reducing the average seating capacity per
departure.

         Jazz, the Corporation's regional carrier, forms an integral part of
Air Canada's domestic and US transborder market strategy. The Corporation
expects to achieve its objectives through the increased use of large regional
jet aircraft which have lower trip costs. This initiative, for which deliveries
commenced in October 2004, will see Air Canada and Jazz add 90 new regional jet
aircraft to their fleet by January 2008. By early 2006, the Corporation had
received all fifteen 75-seat Bombardier CRJ 705 aircraft and fifteen 75-seat
Embraer ERJ 175 aircraft under firm order as well as five 93-seat ERJ 190
aircraft. Forty additional Embraer ERJ 190 aircraft under firm order will be
delivered in the remainder of 2006, during 2007 and in January 2008. In
addition, as a result of agreements reached with Air Canada's and Jazz's unions
during Air Canada's restructuring under the CCAA, all of the Corporation's
Bombardier CRJ aircraft will be operated out of Jazz's regional operations. The
Corporation expects that the lower trip costs of these regional jet aircraft
will enable the Corporation to compete more effectively with low-cost carriers.
This strategy should allow the Corporation to operate its network more
efficiently by better matching capacity with demand and by facilitating
connections in a timely fashion.

         Since international services generally produce higher margins than
domestic and transborder services, the Corporation also intends to expand its
existing services to currently served international destinations as well as
serve new international destinations. The Corporation believes that it is well
positioned to grow its international services and increase its current market
share by leveraging the following competitive advantages:


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ACE Aviation Holdings Inc.                                               Page 12
2005 Management's Discussion and Analysis



(i)      its superior international network;

(ii)     its widely recognized brand and its strong position in the market for
         trans-Atlantic and trans-Pacific travel to and from Canada and more
         recently the Canada-South America market; and

(iii)    its ability to capitalize on the relative speed and convenience
         associated with having its hubs located in Canada which, unlike the
         United States, does not currently require a visa from residents of
         certain countries transiting through the country.

         For domestic, US transborder and international services, the
Corporation will continue to leverage the strengths of its Aeroplan program.

Customer Driven Revenue Model for Passenger Services

         The Corporation's new revenue model for passenger services is aimed at
improving customer satisfaction and retention by focusing on simplicity, value,
choice, transparency and flexibility for the customer and is resulting in
greater passenger volume, higher passenger load factors and increased cost
efficiency for Air Canada and Jazz.

         The new revenue model is based on five simple fare types ranging from
low one-way fares, substantially similar to those offered by low-cost carriers,
to Executive Class fares. The new fares are based on a different combination of
product attributes, including the ability to make changes to reservations, seat
selection and Aeroplan mileage. The new model provides transparency by allowing
customers to compare prices and travel options and select the most suitable
fare. The Corporation believes that this establishes a clear link between price
and value and will be a key driver in achieving customer loyalty.

         The new revenue model was introduced in Air Canada's and Jazz's
domestic markets in May 2003. In February 2004, the new revenue model was
expanded to most destinations in the continental United States served by Air
Canada and Jazz in cooperation with United Airlines, one of Air Canada's Star
Alliance partners. On January 4, 2006, Air Canada expanded its low, simplified
fare structure for flights to and from London Heathrow and Manchester. Air
Canada plans to convert more international destinations to its simplified fare
structure in the near future. The Corporation believes that its increasing use
of the internet to improve its distribution network has facilitated market
acceptance of its new revenue model.

         Another key step in the implementation of its new revenue model was
the introduction in 2005 of a range of multi-trip online pass products that
offer significant buy-in-bulk savings for frequent travelers. This product
also provides online convenience that underlines Air Canada's commitment to
lead the way by giving customers the ability to plan their travel budgets
upfront and execute these plans with minimum variations. Among the products
are Rapidair Flight Passes for travel between Toronto, Hamilton, Ottawa and
Montreal, Western Canada Flight Passes for cities within Western Canada, City
Flight Passes for travel within a specified radius around a city, Flight
Passes to Sun destinations including Hawaii, Week-end Flight Passes and
passes for businesses that permit travel on a pass by up to eight employees
within a firm. In addition, in September of 2005, Air Canada expanded its
line of multi-trip pass products to include the airline industry's first-ever
subscription to unlimited flights. This "North America Unlimited


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ACE Aviation Holdings Inc.                                               Page 13
2005 Management's Discussion and Analysis

<PAGE>

Pass" provided pass holders the freedom to fly as often as they wished
to more than 100 destinations served by Air Canada and Jazz in North America
for a two-month period from October 1 to November 30, 2005 inclusive.

New Corporate Structure to Maximize the Value of Subsidiaries

         A new corporate structure was established pursuant to which the
various business segments that were formerly within Air Canada became
stand-alone subsidiaries of ACE. The new corporate structure was designed to:

(i)      put in place separate management and business plans for each
         subsidiary to better focus their strategic direction and profit making
         efforts;

(ii)     align management, capital and human resource needs within each
         individual business;

(iii)    facilitate the development of each business segment to its fullest
         individual potential including, where appropriate, through the pursuit
         of third party sources of business; and

(iv)     maximize subsidiaries' value that was not fully recognized.

         As part of this strategy to maximize shareholder value by surfacing
the underlying value of its subsidiaries, in June 2005, ACE and the Aeroplan
Income Fund completed an initial public offering of its loyalty management
subsidiary as an income trust. Aggregate net proceeds of the offering were $267
million.

         On February 2, 2006, the Jazz Air Income Fund (the Fund) sold 23.5
million units at a price of $10 per unit for estimated net proceeds of $222
million. The Fund is an unincorporated, open-ended trust created to indirectly
acquire and hold 19.1 per cent of the outstanding limited partnership units of
Jazz. ACE holds the remaining 80.9 per cent of the outstanding limited
partnership units of Jazz.

         The Fund has granted to the underwriters an over-allotment option (the
Over-Allotment Option), exercisable for a period of 30 days following the
closing date, to purchase up to 3.525 million additional units at $10 per unit
for net proceeds of $33 million. In the event the underwriters exercise the
Over-Allotment Option in full, the Fund and ACE will hold 22 per cent and 78
per cent of the outstanding limited partnership units of Jazz respectively.

         ACE's subsidiaries are at varying stages of their corporate
development, and maximizing value at these entities is a priority in the
efforts of senior management. ACE's value enhancement strategy for its
stand-alone subsidiaries includes considering stand-alone financings, sales or
distributions of equity interests and involving outside investors for these and
other purposes.

         From time to time, ACE reviews acquisition opportunities in respect of
businesses or assets that may be complementary to its own. Where appropriate,
to increase shareholder value, ACE may consider entering into acquisitions and
joint ventures.

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ACE Aviation Holdings Inc.                                               Page 14
2005 Management's Discussion and Analysis
<PAGE>



         In addition, ACE is pursuing internal growth opportunities at its
various subsidiaries. In particular, Aeroplan intends to grow its revenues
through greater access to Air Canada's network for mileage redemption and the
addition of new partners across various retail segments. ACTS intends to
leverage its expertise and develop its third party customer base, including US
carriers that have recently increased their outsourcing of maintenance repair
and overhaul work (MRO).

Other Investments

         On September 27, 2005, the Corporation invested $87 million (US$75
million) in US Airways Group Inc. (US Airways) in conjunction with the
carrier's exit from US bankruptcy proceedings. The Corporation's investment
represented approximately 6 per cent of the equity of US Airways at December
31, 2005.


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ACE Aviation Holdings Inc.                                               Page 15
2005 Management's Discussion and Analysis

<PAGE>

4.  CONSOLIDATED RESULTS OF OPERATIONS - FOURTH QUARTER ANALYSIS

         The following table compares the consolidated results of operations of
ACE for the fourth quarter of 2005 to the fourth quarter of 2004.

<TABLE>
<CAPTION>

                                          Consolidated Statement of Operations
                                          ------------------------------------
----------------------------------------------------------------------------------------------------------------------------
                                                                            ACE
                                                      ----------------------------------------------------------------------
($ millions, except per share figures)                  Three Months ended      Three Months ended         $          %
(Unaudited)                                             December 31, 2005        December 31, 2004      Change     Change
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                   <C>          <C>         <C>

Operating revenues
Passenger                                                              1,969                 1,681        288         17
Cargo                                                                    176                   151         25         17
Other                                                                    217                   230        (13)        (6)
                                                      --------------------------------------------------------
                                                                       2,362                 2,062        300         15
                                                      ----------------------- --------------------- ----------
Operating expenses
Salaries, wages and benefits                                             648                   596         52          9
Aircraft fuel                                                            578                   432        146         34
Aircraft rent                                                            117                   111          6          5
Airport and navigation fees                                              222                   198         24         12
Aircraft maintenance, materials and supplies                             104                    78         26         33
Communications and information technology                                 73                    66          7         11
Food, beverages and supplies                                              81                    76          5          7
Depreciation, amortization and obsolescence                              125                    85         40         47
Commissions                                                               47                    65        (18)       (28)
Other                                                                    402                   358         44         12
                                                      --------------------------------------------------------
                                                                       2,397                 2,065        332         16
                                                      --------------------------------------------------------

                                                      --------------------------------------------------------

Operating loss                                                           (35)                   (3)       (32)

Non-operating income (expense)
Interest income                                                           19                    11          8
Interest expense                                                         (87)                  (60)       (27)
Interest capitalized                                                       6                     2          4
Loss on sale of and provisions on assets                                 (30)                    -        (30)
Other                                                                      4                     -          4
                                                      --------------------------------------------------------
                                                                         (88)                  (47)       (41)
                                                      --------------------------------------------------------

Loss before the following items:                                        (123)                  (50)       (73)

Non-controlling interest                                                  (8)                    -         (8)
Foreign exchange gain (loss)                                             (11)                   78        (89)
Recovery of (provision for) income taxes                                  39                   (13)        52
                                                      --------------------------------------------------------
Income (loss) for the period                                            (103)                   15       (118)
                                                      ========================================================

Earnings (loss) per share
- Basic                                                                (1.02)                 0.17      (1.19)
- Diluted                                                              (1.02)                 0.17      (1.19)

EBITDAR(1)                                                               207                   193         14
----------------------------------------------------------------------------------------------------------------------------
(1) Refer to "Non-GAAP Financial Measures" on page 6 of this MD&A for additional information on EBITDAR.
</TABLE>

<TABLE>
<CAPTION>

                                             Operating Statistics
----------------------------------------------- ----------------------------------------------------------------------------
                                                                                   ACE
                                                ----------------------------------------------------------------------------
                                                  Three Months ended      Three Months ended                    %
                                                  December 31, 2005        December 31, 2004      Change     Change
----------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                      <C>           <C>          <C>
Revenue Passenger Miles (millions)                            10,584                   9,681         903          9
Available Seat Miles (millions)                               13,808                  12,815         993          8
Passenger Load Factor (%)                                       76.7                    75.5      1.2 pp
----------------------------------------------------------------------------------------------------------------------------
</TABLE>



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ACE Aviation Holdings Inc.                                               Page 16
2005 Management's Discussion and Analysis
<PAGE>

4.1.  Comparison of Results - Fourth Quarter 2005 versus Fourth Quarter 2004

         ACE applied fresh start reporting on September 30, 2004 and,
therefore, the fourth quarter of 2005 is directly comparable to the fourth
quarter of 2004, with the exception of the adoption of AcG-15.

         Aircraft fuel expense was the most significant expense increase,
affecting profitability in 2005, rising $146 million or 34 per cent in the
fourth quarter of 2005 and $592 million or 37 per cent for the full year of
2005, when compared to 2004 levels. In the first three quarters of 2005,
excluding fuel expense, unit cost, as measured by operating expenses per ASM,
showed quarter-over-quarter decreases which largely reflected the impact of
fresh start reporting on the 2005 quarters, the continuing cost reduction
initiatives and increased employee productivity. Excluding fuel expense, unit
cost for the fourth quarter of 2005 rose 4 per cent over the fourth quarter of
2004. Ownership costs, comprised of aircraft rent and depreciation, were
significant factors in the increase in unit cost, excluding fuel. Ownership
costs, as well as other costs, were affected by the addition of 41 new regional
aircraft, such as the Embraer ERJ 175/190 and the Bombardier CRJ-705 aircraft,
with higher unit costs but with lower trip costs, and two extra freighters in
the 2005 quarter. These freighters incurred operating costs but produced no
ASMs. Higher aircraft maintenance material and supplies expense was another
significant negative factor.

         For the fourth quarter of 2005, ACE reported an operating loss of $35
million, a deterioration of $32 million compared to the operating loss of $3
million recorded in the same quarter of 2004. EBITDAR improved $14 million over
the 2004 quarter. Refer to "Non-GAAP Financial Measures" on page 6 of this MD&A
for additional information on EBITDAR.

         In the fourth quarter of 2005, total operating revenues increased $300
million or 15 per cent compared to the fourth quarter of 2004. Passenger
revenues were up $288 million or 17 per cent reflecting increases in all
markets due to both a yield improvement of 7 per cent as well as an increase in
passenger traffic of 9 per cent. The system yield improvement was primarily due
to increased fare levels in the domestic and US transborder markets and
significantly increased fuel surcharges in the international markets to cover
higher fuel costs. An improved domestic competitive position and a stronger
market demand for the higher-priced Tango Plus product, the next level up from
the basic best value fare, providing additional features such as advance seat
selection and increased Aeroplan points, were also factors in the domestic
yield improvement. Additionally, US transborder yield also improved as a result
of a redesign of conditions underlying fares aimed at the business-oriented
market which occurred in the fourth quarter of 2005.

         Operating expenses increased $332 million or 16 per cent versus the
fourth quarter of 2004, including an increase in fuel expense of $146 million
or 34 per cent over the fourth quarter of 2004. Capacity, as measured in
available seat miles (ASM), increased 8 per cent. Unit cost for the fourth
quarter of 2005, as measured by operating expense per ASM, increased 8 per cent
from the fourth quarter of 2004.

         In the fourth quarter of 2005, non-operating expense amounted to $88
million, an increase of $41 million from the fourth quarter of 2004. In the
fourth quarter of 2005, loss on sale of and provisions on assets of $30 million
was recorded, of which approximately $15 million related to the write-down of
inactive Boeing 747 inventory.

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ACE Aviation Holdings Inc.                                               Page 17
2005 Management's Discussion and Analysis
<PAGE>


         Losses from revaluation of foreign currency monetary items and the
impact of foreign currency derivative contracts totaled $11 million in the
fourth quarter of 2005 and were mainly attributable to a weaker Canadian dollar
versus the US dollar at December 31, 2005 compared to September 30, 2005.
Foreign exchange gains of $78 million were recorded in the fourth quarter of
2004.

         The Corporation recorded a recovery of income taxes of $39 million in
the fourth quarter of 2005. This compared to a provision for income taxes of
$13 million in the 2004 quarter.

         Net loss for the fourth quarter of 2005 was $103 million compared to
net income of $15 million recorded in the fourth quarter of 2004, a
deterioration of $118 million.


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ACE Aviation Holdings Inc.                                               Page 18
2005 Management's Discussion and Analysis
<PAGE>

4.2.  Revenue Performance - Fourth Quarter 2005 versus Fourth Quarter 2004

Passenger Revenues

         As a result of the inclusion of Aeroplan passenger revenues in
passenger revenues starting in October 2004, as described on page 8 of this
MD&A, the year-over-year percentage changes by quarter are not directly
comparable, with the exception of the fourth quarter. For comparative purposes,
the table below describes, by major market, the percentage change from the
prior year in passenger revenues for the eight most recent quarters, excluding
the impact of the policy change related to Aeroplan passenger revenues.

<TABLE>
<CAPTION>

                                     Passenger Revenue % Change Year-over-Year by Quarter
                                     ----------------------------------------------------
-------------- ------------------------------------- ---------------------------------------------------------------------------
                       Predecessor Company                                                 ACE
                            Air Canada
-------------- ------------------------------------- ---------------------------------------------------------------------------
                                                                                                                     Quarter 4
                                                                                                                       2005
                Quarter 1   Quarter 2    Quarter 3    Quarter 4   Quarter 1    Quarter 2   Quarter 3    Quarter 4    including
                  2004         2004        2004         2004         2005        2005         2005        2005       Aeroplan
-------------- ------------ ----------- ------------ ------------ ----------- ------------ ----------- ------------ ------------
<S>                <C>          <C>          <C>          <C>         <C>         <C>          <C>            <C>          <C>
Canada             (9)          8            3            0           1           13           17             19           20
US                (13)          5           (1)         (17)         (13)          0           6              21           23
Atlantic           (5)          6            6            4           8           10           9              13           14
Pacific            15          162          113          35           14          11           5              6            7
Other              24           38          25           22           17          18           18             11           12
-------------- ------------ ----------- ------------ ------------ ----------- ------------ ----------- ------------ ------------
System             (5)          15          12            1           1           10           12             16           17
(excluding
Aeroplan)
-------------- ------------ ----------- ------------ ------------ ----------- ------------ ----------- ------------ ------------
System
(including         (5)          15          12            4           5           14           16             17           17
Aeroplan)
-------------- ------------ ----------- ------------ ------------ ----------- ------------ ----------- ------------ ------------
</TABLE>

         The table below describes quarter-over-quarter percentage changes in
passenger revenues, capacity as measured by available seat miles (ASMs),
traffic as measured by RPMs, passenger load factor as measured by RPMs divided
by ASMs, yield as measured by passenger revenue per RPM and RASM as measured by
passenger revenue per ASM.

<TABLE>
<CAPTION>
                                          Operating Statistics
                                          --------------------
                                 Quarter 4, 2005 versus Quarter 4, 2004
                                 --------------------------------------
------------------- --------------  --------------  -------------  ---------------  -----------  -----------
                       Passenger        Capacity       Traffic      Passenger Load
                       Revenue           (ASMs)        (RPMs)          Factor         Yield         RASM
                       % Change        % Change       % Change        pp Change      % Change     % Change
------------------- --------------  --------------  -------------  ---------------  -----------  -----------
<S>                      <C>               <C>           <C>             <C>              <C>          <C>
Canada                   20                7             7               0.4              12           12
US                       23                8             12              2.7              9            14
Atlantic                 14                11            13              1.4              0            2
Pacific                  7                 5             7               1.0              0            2
Other                    12                8             8               0.0              5            5
------------------- --------------  --------------  -------------  ---------------  -----------  -----------
System                   17                8             9               1.2              7            9
------------------- --------------  --------------  -------------  ---------------  -----------  -----------
</TABLE>

         As compared to the fourth quarter of 2004, system passenger revenues
were up $288 million or 17 per cent in the fourth quarter of 2005. The
passenger revenue growth versus the 2004 quarter was due to increases in both
yield and passenger traffic. In the fourth quarter of 2005, system passenger
traffic grew 9 per cent, reflecting a strong market demand for the Air Canada
and Jazz products, on an increase of 8 per cent in ASM flying capacity. As a
result of the growth in passenger traffic, system passenger load factor
improved 1.2 percentage points to 76.7 per cent, a record high load factor for
the fourth quarter. System yield improved 7 per cent and reflected yield
increases in all markets with the exception of the

-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                               Page 19
2005 Management's Discussion and Analysis
<PAGE>


Atlantic and Pacific markets which remained unchanged. The system
yield improvement was primarily due to increased fare levels in the domestic
and US transborder markets. International fares remained under pressure in the
quarter and the weakening of foreign currencies against the stronger Canadian
dollar partially offset the additional revenue from fuel surcharges. An
improved domestic competitive position and a stronger market demand for the
higher-priced Tango Plus product were also factors in the domestic yield
improvement. Additionally, US transborder yield also improved as a result of a
redesign of conditions underlying fares aimed at the business-oriented market
which occurred in the fourth quarter of 2005. System RASM rose 9 per cent over
the fourth quarter of 2004, reflecting both the improvement in passenger load
factor and the increase in yield.

         Domestic passenger revenues amounted to $854 million in the 2005
quarter, an increase of $141 million or 20 per cent from the fourth quarter of
2004. Domestic traffic and ASM capacity were both up by 7 per cent resulting in
a passenger load factor slightly above that of the fourth quarter of 2004.
Capacity increases were largely on transcontinental services between Toronto
and Calgary and Edmonton as well as services within Western Canada. Domestic
yield improved 12 per cent mainly due to increased fare levels to cover higher
fuel costs, the Corporation's improved domestic competitive position, as well
as a stronger market demand for the higher-priced Tango Plus product, the next
level up from the basic best value fare. The Tango Plus product provides
additional features such as advance seat selection and increased Aeroplan
points. Reflecting the yield improvement, domestic RASM rose 12 per cent above
the 2004 level.

         US transborder passenger revenues rose $73 million or 23 per cent in
the fourth quarter of 2005 versus the fourth quarter of 2004. US transborder
traffic grew 12 percent on an ASM capacity increase of 8 per cent resulting in
a passenger load factor improvement of 2.7 percentage points. Capacity
increases were largely on the Las Vegas route and on certain California routes
such as San Francisco and San Diego. New services to Las Vegas were launched
from Vancouver and Calgary and frequencies were increased from both Montreal
and Toronto. The additional capacity to California reflected a new service from
Vancouver to San Diego as well as increased frequencies on existing services.
US yield improved 9 per cent partly reflecting the redesign of conditions
underlying fares aimed at the business-oriented market which occurred in the
fourth quarter of 2005 as well as increased fare levels to cover higher fuel
costs. As a result of both the yield improvement and the higher passenger load
factor, RASM was up 14 per cent from the fourth quarter of 2004.

         Atlantic passenger revenues increased $44 million or 14 per cent in
the fourth quarter of 2005. Despite increased fuel surcharges to cover higher
fuel costs, Atlantic yield was essentially unchanged from the 2004 quarter
reflecting a significant weakening of foreign currencies for sales denominated
in euro and pound sterling as well as a competitive pricing environment as a
result of growth in charter capacity to Europe and the United Kingdom. Atlantic
traffic rose 13 per cent largely reflecting the addition of the routes to
Zurich, Switzerland and to Rome, Italy and to a stronger market demand in
France and the United Kingdom markets. Capacity increased 11 per cent largely
due to the addition of the routes to Zurich and to Rome and, to a lesser
extent, increased capacity to France. As a result of the traffic increase,
Atlantic passenger load factor improved 1.4 percentage points. RASM increased 2
per cent reflecting the passenger load factor improvement.


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ACE Aviation Holdings Inc.                                              Page 20
2005 Management's Discussion and Analysis
<PAGE>

         Pacific passenger revenues were up $15 million or 7 per cent from the
fourth quarter of 2004. Despite increased fuel surcharges to cover higher fuel
costs, Pacific yield was essentially unchanged from the fourth quarter of 2004.
Yield improvements in the Korea, China and Hong Kong markets were offset by
lower yields in the Japan market reflecting an increased competitive pricing
environment as a result of significant growth in capacity from both 6th Freedom
and foreign carriers. The weakening of the Japanese yen against the stronger
Canadian dollar compared to the fourth quarter of 2004 also had a significant
negative impact on Pacific yields. Pacific passenger traffic grew 7 per cent on
a 5 per cent increase in ASM capacity, primarily due to the recently introduced
Toronto-Beijing route and an upgrade from a Boeing 767 to an Airbus A340 on the
Toronto to Tokyo route. The passenger load factor improved 1.0 percentage point
compared to the 2004 quarter. As a result of the improvement in the passenger
load factor, RASM increased 2 per cent.

         The South Pacific, Caribbean, Mexico and South America passenger
revenues were up $15 million or 12 per cent from the fourth quarter of 2004.
Traffic and ASM capacity both increased 8 per cent resulting in a passenger
load factor unchanged from the 2004 quarter. Yield rose 5 per cent over the
fourth quarter of 2004. RASM also increased 5 per cent as result of the yield
improvement. The growth in these markets was largely from additional flying to
South America, primarily capacity increases on Toronto-Sao Paulo and
Toronto-Bogota as well as increased frequency on Toronto-Santiago/Buenos Aires
and, to a lesser extent, from increased service to traditional leisure
destinations including the new Toronto-Santo Domingo route.

Cargo Revenues

         In 2005, the Corporation also provided cargo services from Toronto to
key markets including Frankfurt, Shanghai and Los Angeles, using three
chartered MD-11 all-cargo freighter aircraft. Two of the aircraft were added in
2005. The Frankfurt freighter operations commenced in November 2004, in order
to replace cargo capacity following the earlier retirement of Boeing 747-400
Combi aircraft. The Shanghai freighter operations commenced in the spring of
2005.

         Fourth quarter cargo revenues increased $25 million or 17 per cent and
cargo traffic increased 16 per cent over 2004. This was mainly due to the
addition of the two freighter aircraft in 2005 and greater cargo volumes
notably in the Pacific market. Freighter revenues increased $29 million over
the fourth quarter of 2004 and represented almost one quarter of cargo revenues
in the 2005 quarter. Yield per revenue ton mile was one per cent higher than in
the fourth quarter of 2004. The favourable yield impact of higher fuel
surcharges was largely offset by the relative growth in lower-yielding
long-haul freight traffic and the adverse effect of a stronger Canadian dollar
on foreign currency denominated revenues

Other Revenues

         Other non-transportation revenues were down $13 million or 6 per cent
in the fourth quarter of 2005 largely as a result of lower third party engine
maintenance revenues as well as a decrease in revenues from Air Canada
Vacations due to the worst hurricane season on record which resulted in
significantly lower passenger volumes, information technology system
implementation challenges, as well as Air Canada Vacations' response to an
aggressive competitive environment.

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ACE Aviation Holdings Inc.                                              Page 21
2005 Management's Discussion and Analysis
<PAGE>

4.3.  Cost Performance - Fourth Quarter 2005 versus Fourth Quarter 2004

Impact of the Adoption of AcG-15

       Effective January 1, 2005, the Corporation adopted AcG-15. Refer to Note
2 to the 2005 Annual Consolidated Financial Statements for additional
information on the adoption of AcG-15.

       For the fourth quarter of 2005, the net impact of adopting AcG-15 on the
Corporation's results was a before tax charge of $17 million or $0.17 per share,
basic. The impact of the adoption of AcG-15 was a reduction to aircraft rent
expense of $33 million, an increase to depreciation expense of $20 million, an
increase to net interest expense of $19 million, a foreign exchange loss of $8
million and a non-controlling interest charge of $3 million compared to
financial results had AcG-15 not been effective.

Operating Expenses

       In the fourth quarter of 2005, total operating expenses increased $332
million or 16 per cent compared to the fourth quarter of 2004 and included a
fuel expense increase of $146 million or 34 per cent. Unit cost rose 8 percent
over the 2004 level. Excluding fuel expense, unit cost increased 4 per cent in
the fourth quarter of 2005. Ownership costs, comprised of aircraft rent and
depreciation, were significant factors in the increase in unit cost, excluding
fuel. Ownership costs, as well as other costs, were affected by the addition of
41 new regional aircraft, such as the Embraer ERJ 175/190 and the Bombardier
CRJ-705 aircraft, with higher unit costs but with lower trip costs, and two
extra freighters in the 2005 quarter. These freighters incurred operating costs
but produced no ASMs. Higher aircraft maintenance material and supplies expense
was another significant negative factor.

       Salaries and wages expense totaled $519 million in the fourth quarter of
2005, an increase of $42 million from the fourth quarter of 2004. Also included
in salaries and wages expense in the fourth quarter of 2005 was approximately
$40 million relating to employee profit sharing programs. Expenses of $2 million
related to the profit sharing programs were recorded in 2004. Average full-time
equivalent (FTE) employees increased 3 per cent on a capacity increase of 8 per
cent over the 2004 quarter. The increase resulting from higher employee levels
was partly offset by a reduction in average salaries reflecting employees being
hired at lower wage scales. Employee productivity, as measured by ASM per FTE
employee, grew 4 per cent over the fourth quarter of 2004.

       Employee benefits expense amounted to $129 million in the fourth quarter
of 2005, an increase of $10 million or 8 per cent from the fourth quarter of
2004, largely relating to revised pension actuarial estimates and to an
adjustment in 2005 relating to an updated actuarial evaluation of workers'
compensation liability.

       On a capacity increase of 8 per cent, fuel expense was up $146 million or
34 per cent reflecting continuing record high fuel prices. The average base fuel
price increase of $129 million and the volume-related increase of $42 million
were partially offset by a reduction of $28 million due to the favourable impact
of a stronger Canadian dollar versus the US dollar during the quarter when
compared to the fourth quarter of 2004. Beginning in September 2005, the
Corporation has implemented a systematic fuel risk management strategy and has
entered into contracts with financial intermediaries to manage its exposure

-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 22
2005 Management's Discussion and Analysis
<PAGE>


to jet fuel price volatility. A fuel hedging loss of $3 million
relating to these contracts was recorded in the fourth quarter of 2005. On a
unit cost basis, fuel expense per ASM rose 24 per cent.

       Aircraft rent expense increased $6 million or 5 per cent over the fourth
quarter of 2004 mainly as a result of aircraft additions to the fleet largely
offset by the impact of the adoption of AcG-15.

       Airport and navigation fees rose $24 million or 12 per cent over the 2004
quarter. Higher landing and general terminal fees, primarily at Toronto's Lester
B. Pearson (Pearson) International Airport, as well as an 8 per cent increase in
aircraft departures versus the 2004 quarter were the main factors for the
increase.

       Aircraft maintenance, materials and supplies expense increased $26
million or 33 per cent. The increase was primarily related to timing of engine
maintenance activities and to the contracting out of heavy aircraft maintenance
activities to outside maintenance, repair and overhaul (MRO) companies as ACTS,
Air Canada and Jazz's primary MRO service provider, was operating at full
capacity in the fourth quarter of 2005, and to the addition of Bombardier
regional jet aircraft to the Jazz fleet. The increase was partly offset by the
impact of the retirement of the BAe-146 aircraft fleet. The contracting out of
maintenance activities to MRO companies resulted in increased aircraft
maintenance, materials and supplies expense as all expenses (including labour)
relating to the services purchased were included in this expense category.

       Communications and information technology expense was up $7 million or 11
per cent largely due to an increase in information technology projects and also
included a higher volume of communication services for web and Global
Distribution System (GDS). The volume-related increases were partly offset by
renegotiated contract rates for information technology and communications
services and by the impact of a stronger Canadian dollar versus the US dollar in
the quarter when compared to the fourth quarter of 2004.

       Food, beverage and supplies expense increased $5 million or 7 per cent
versus the 2004 quarter on a passenger traffic increase of 9 per cent. The
volume-related increase was largely offset by cost reduction initiatives and the
impact of the new catering and buy-on-board programs. Additional expenses
related to international service improvements were also a factor in the overrun.

       Depreciation, amortization and obsolescence expense rose $40 million
or 47 per cent largely due to the adoption of AcG-15 and as a result of a
change in the estimated lives of certain aircraft.

       Commission expense was down $18 million or 28 per cent on combined
passenger and cargo revenue growth of 17 per cent. The main reason for the
decrease in commission expense was the impact of a new commission structure
for web and GDS bookings as well as lower international commissions which
more than offset the volume-related increase.

       When compared to the fourth quarter of 2004, the other operating
expense category was up $44 million or 12 per cent and included increases in
credit card fees as a result of increased volume and


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ACE Aviation Holdings Inc.                                              Page 23
2005 Management's Discussion and Analysis
<PAGE>


average rates, legal and advisory fees, expenses related to the new
uniform program and Aeroplan non-air redemption expenses. These increases were
partly offset by lower advertising and promotion expense, reduced customer
maintenance materials and lower expenses at Air Canada Vacations.

Non-Operating Expense

       Non-operating expense totaled $88 million in the fourth quarter of 2005,
a $41 million increase from the fourth quarter of 2004. Net interest expense
amounted to $62 million in the 2005 quarter, an increase of $15 million from the
2004 quarter, comprised primarily of higher interest expense of $19 million as a
result of the adoption of AcG-15 partially offset by an increase of $8 million
in interest income reflecting higher average interest rates. In the fourth
quarter of 2005, loss on sale of and provision on assets of $30 million was
recorded of which approximately $15 million related to the write-down of
inactive Boeing 747 inventory.

Foreign Exchange Gains

         Loss from revaluation of foreign currency monetary items amounted to
$11 million in the fourth quarter of 2005 attributable to a weaker Canadian
dollar versus the US dollar at December 31, 2005 compared to September 30,
2005. This loss included $5 million related to capital lease obligations and $8
million as a result of the adoption of AcG-15. In the fourth quarter of 2004,
foreign exchange gains amounted to $78 million.

Future Income Taxes

         Recovery for income taxes amounted to $39 million in the fourth
quarter of 2005 compared to a provision of $13 million recorded in the fourth
quarter of 2004.

         The comparison of fourth quarter financial results has been provided
based on the consolidated results of ACE. Effective September 30, 2004, the
Corporation's businesses are operated through four reportable segments:
Transportation Services, Aeroplan, Jazz and ACTS. Refer to Section 11 of this
MD&A for additional analysis of fourth quarter results for ACE's four
reportable segments.



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ACE Aviation Holdings Inc.                                              Page 24
2005 Management's Discussion and Analysis
<PAGE>

5.  CONSOLIDATED RESULTS OF OPERATIONS - 2005 VERSUS 2004 COMBINED

5.1.   Performance at a Glance

         This section provides year-over-year comparisons for the years 2001
through to 2005 using Annual Supplementary Non-GAAP Combined Information for
the year 2004, as defined on page 4 of this MD&A.

         As a result of the inclusion of Aeroplan passenger revenues in
passenger revenues starting in October 2004, as described on page 8 of this
MD&A, year-over-year passenger revenue, RASM and yield information is not
directly comparable to previous years. For comparative purposes, unless
otherwise indicated, the following graphs and discussion will provide the
reader with passenger revenue, RASM and yield changes that exclude the impact
of the policy change related to Aeroplan passenger revenues. However, the
graphs and discussion will also provide passenger revenue, RASM and yield
changes that include the impact of the policy change related to Aeroplan
passenger revenues.

Operating Income (loss) before reorganization and restructuring items and
non-recurring labour expenses and Operating Margin



                Operating     Operating     o  Operating income of $452 million,
Year            Income ($M)   Margin (%)       a $335 million improvement from
----------------------------------------       the 2004 Combined operating
2001              (731)           (7.6)        income, before reorganization and
2002              (192)           (2.0)        restructuring items, of $117
2003              (684)           (8.2)        million.
2004 (Combined)    117             1.3      o  Operating revenues increased $930
2005               452             4.6         million or 10 per cent over 2004
----------------------------------------       Combined, mainly reflecting
                                               passenger revenue increases in
[tabular presentation of graphic display]      all markets and including the
                                               transfer of Aeroplan passenger
                                               revenues to the Passenger revenue
                                               category beginning in October
                                               2004.


o  Operating expenses up $595 million or 7 per cent versus 2004 Combined,
   including a $592 million or 37 per cent increase in fuel expense.

o  Unit cost, as measured by operating expense per ASM, up 3 per cent over 2004
   Combined.

o  Excluding fuel expense, unit cost down 4 per cent, in part reflecting the
   impact of fresh start reporting.


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ACE Aviation Holdings Inc.                                              Page 25
2005 Management's Discussion and Analysis
<PAGE>


EBITDAR, before reorganization and restructuring items and non-recurring labour
expenses



                  EBITDAR       EBITDAR       o  EBITDAR increased $205 million
Year               ($M)        Margin (%)        in 2005 to $1,351 million
----               ----        ----------        despite an increase in fuel
2001                  669          7.0           expense of $592 million or 37
2002                1,289         13.1           per cent  over 2004 Combined.
2003                  690          8.2        o  EBITDAR margin rose 0.8
2004 (Combined)     1,146         12.9           percentage points over 2004
2005                1,351         13.7           Combined. Refer to "Non-GAAP
                                                 Financial Measures" on page 6
[tabular presentation of graphic display]        of this MD&A for additional
                                                 information on EBITDAR.




Passenger Revenue Change

Year                       $M                 o  In 2005, passenger revenues,
----                      -----                  including Aeroplan passenger
2001                      8,123                  revenues, increased $960
2002                      8,190                  million or 13 per cent
2003                      6,858                  reflecting increases in all
2004 (comb.)              7,268                  markets and including the
2004(1) (comb.)           7,309                  transfer of Aeroplan passenger
2005                      7,979                  revenues in the Passenger
2005(1)                   8,269                  revenue category beginning in
________________                                 October 2004.
(1)  Including Aeroplan Passenger Revenues




Passenger Revenue $M Change by Service - 2005 versus 2004 Combined


                                 $M           o  Canada passenger revenues,
                               ------            including Aeroplan passenger
Canada Consolidated             379              revenues, showed considerable
Canada Consolidated(1)          498              growth over 2004 Combined,
US Consolidated                  30              rising $498 million or 17 per
US Consolidated(1)               89              cent.
Other International             302           o  US transborder passenger
Other International(1)          373              revenues, including Aeroplan
_____________________                            passenger revenues, were up $89
(1)  Including Aeroplan Passenger Revenues       million or 6 per cent.
                                              o  Other international revenues,
                                                 including Aeroplan passenger
                                                 revenues, increased $373
                                                 million or 13 per cent.




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ACE Aviation Holdings Inc.                                              Page 26
2005 Management's Discussion and Analysis
<PAGE>



Passenger Revenues and Statistics - % change 2005 versus 2004 Combined

                              %
                           ------        o  RASM, including Aeroplan
Traffic (RPMs)                8             passenger revenues, improved 9
Capacity (ASMs)               4             per cent year-over-year due to
Load factor (pp)             2.7            both a 2.7 percentage point
RASM                          6             improvement in passenger load
RASM (1)                      9             factor and a yield increase of
Yield per RPM                 2             5 per cent.
Yield per RPM (1)             5          o  2005 system traffic was up 8 per
________________                            cent on a 4 per cent increase
(1) Including Aeroplan                      in ASM capacity.
    Passenger Revenues





Aircraft Fuel Expense

                                         o  With record high fuel prices,
                                            aircraft fuel expense was up $592
                                            million or 37 per cent on a capacity
     Fuel Price per Litre (1)               increase of 4 per cent from 2004
     ------------------------               Combined.
Year                      Cents          o  The average base price of fuel
2001                       39.4             increase of $659 million and the
2002                       34.0             volume-related increase of $89
2003                       37.4             million were partly offset by a
2004 (combined)            46.2             decrease of $159 million as a result
2005                       60.0             of the favourable impact of a
________________                            stronger Canadian dollar.
(1)  Including fuel hedging and          o  Average fuel price per litre rose 30
     fuel handling expenses                 per cent over 2004 Combined.
                                         o  In 2005, the average price per litre
                                            was 60 cents with an average West
                                            Texas Intermediate (WTI) crude oil
                                            price per barrel of US$55 compared
                                            to an average price per litre of 46
                                            cents with an average WTI crude oil
                                            price per barrel of US$40.


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ACE Aviation Holdings Inc.                                              Page 27
2005 Management's Discussion and Analysis
<PAGE>


Operating Cost Performance

Changes in Operating Expense, ASM Capacity, Unit Cost (1) and

Unit Cost, excluding fuel expense (2)



% change 2005 versus 2004 Combined

                                            Operating       Operating expense
                     ASM       Operating     expense          per ASM, excl.
                  capacity      expense      per ASM          fuel expense
                  --------      -------      -------          ------------
Q1                   -2             (3)         (2)                (6)
Q2                    4              4           0                 (8)
Q3                    6             12           5                 (3)
Q4                    8             16           8                  3
Total Year            4              7           3                 (4)

[tabular presentation of graphic display]


o  For the full year 2005, unit cost was up 3 per cent over 2004 Combined.
o  Excluding fuel expense, unit cost in 2005 was down 4 per cent.
o  ASM capacity increased 4 per cent in 2005 versus 2004 Combined.



   (1)  Unit cost is calculated as operating expense divided by ASMs.
   (2)  Unit cost, excluding fuel expense, is calculated as operating
        expense, removing fuel expense, divided by ASMs.


Cash Flows from (used for) Operations

                                         o  Cash flows from operations amounted
                                            to $675 million in 2005, compared to
Year                      $M                cash flows used for operations of
----                   ---------            $66 million in 2004 Combined.
2001                   (1,072)           o  2004 Combined cash flows used for
2002                      (95)              operations included $314 million of
2003                      139               net payments made on September 30,
2004 (Combined)           (66)              2004. These payments related mainly
2005                      675               to settlement of restructuring
                                            obligations.
[tabular presentation of graphic display]




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ACE Aviation Holdings Inc.                                              Page 28
2005 Management's Discussion and Analysis
<PAGE>


5.2.  Comparison of Results - 2005 versus 2004 Combined

         The following table compares the 2005 Consolidated Statement of
Operations of ACE, the 2004 Combined Statement of Operations as defined on page
4 of this MD&A under "Non-GAAP Financial Measures", and the 2003 Consolidated
Statement of Operations of the Predecessor Company.

<TABLE>
<CAPTION>

                                           Consolidated Statement of Operations
                                           ------------------------------------
---------------------------------------------------- ----------- ------------ -------------- -------------- --------------
                                                        ACE       Combined     Air Canada          %              %
                                                                                                Change         Change
                                                     ----------- ------------ -------------- -------------- --------------
                                                                                              2005 versus    2005 versus
($ millions, except per share figures)                  2005        2004          2003           2004           2003
---------------------------------------------------- ----------- ------------ -------------- -------------- --------------
<S>                                                       <C>          <C>            <C>              <C>           <C>

Operating revenues
Passenger                                                 8,269        7,309          6,858            13            21
Cargo                                                       620          556            519            12            19
Other                                                       941        1,035            996            (9)           (6)
                                                     ----------- ------------ --------------
                                                          9,830        8,900          8,373            10            17
                                                     ----------- ------------ --------------
Operating expenses
Salaries, wages and benefits                              2,520        2,585          2,828            (3)          (11)
Aircraft fuel                                             2,198        1,606          1,253            37            75
Aircraft rent                                               417          632          1,008           (34)          (59)
Airport and navigation fees                                 924          814            743            14            24
Aircraft maintenance, materials and supplies                367          343            385             7            (5)
Communications and information technology                   303          302            390             0           (22)
Food, beverages and supplies                                334          340            334            (2)            0
Depreciation, amortization and obsolescence                 482          397            366            21            32
Commissions                                                 253          305            273           (17)           (7)
Other                                                     1,580        1,459          1,477             8             7
                                                     ----------- ------------ --------------
                                                          9,378        8,783          9,057             7             4
                                                     ----------- ------------ --------------
Operating income (loss) before reorganization
amd restructuring items                                     452          117           (684)

Reorganization and restructuring items                        -         (871)        (1,050)

Non-operating income (expense)
Aeroplan dilution gain                                      190            -              -
Interest income                                              66           17             25
Interest expense                                           (315)        (229)          (115)
Interest capitalized                                         14            2              4
Loss on sale of and provisions on assets                    (28)         (75)          (168)
Other                                                       (12)          (8)           (28)
                                                     ----------- ------------ --------------
                                                            (85)        (293)          (282)
                                                     ----------- ------------ --------------

                                                     ----------- ------------ --------------
Income (loss) before the following items:                   367       (1,047)        (2,016)

Non-controlling interest                                    (24)           -              -
Foreign exchange gain                                        46          182            137
Recovery of (provision for) income taxes                   (131)         (15)            12
                                                     ----------- ------------ --------------
Income (loss) for the period                                258         (880)        (1,867)
                                                     =========== ============ ==============

Earnings (loss) per share (1)
- Basic                                                    2.63           nm        ($15.53)
- Diluted                                                  2.46           nm        ($15.53)

EBITDAR(2)                                                1,351        1,146            690
---------------------------------------------------- ----------- ------------ -------------- -------------- --------------

(1)  Pursuant to the Plan as further described in Note 19 to the 2005 Annual Consolidated Financial
     Statements, all issued and outstanding options of Air Canada and warrants were cancelled
     without payment or consideration on September 30, 2004. In addition, a new ACE share capital
     structure was established, as further described in Note 12 to the 2005 Annual Consolidated
     Financial Statements.
</TABLE>


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ACE Aviation Holdings Inc.                                              Page 29
2005 Management's Discussion and Analysis
<PAGE>



(2) Refer to "Non-GAAP Financial Measures" on page 6 of this MD&A for a
    reconciliation of EBITDAR for the years 2004 and 2005. 2003 EBITDAR of $690
    million is reconciled to operating income (loss) before reorganization and
    restructuring items, as follows: GAAP operating income before
    reorganization and restructuring items of ($684) million, adding back
    aircraft rent of $1,008 million and depreciation, amortization and
    obsolescence of $366 million.

<TABLE>
<CAPTION>
                                      Operating Statistics
                                      --------------------
------------------------------------ ------------ ------------ -------------- -------------- --------------
                                         ACE       Combined     Predecessor         %              %
                                                                  Company        Change         Change
                                     ------------ ------------ -------------- -------------- --------------
                                                                               2005 versus    2005 versus
                                        2005         2004          2003           2004           2003
------------------------------------ ------------ ------------ -------------- -------------- --------------
<S>                                       <C>          <C>            <C>                 <C>           <C>
Revenue Passenger Miles (millions)        46,764       43,427         39,565              8             18
Available Seat Miles (millions)           58,822       56,536         54,160              4              9
Passenger Load Factor (%)                   79.5         76.8           73.1         2.7 pp         6.4 pp
------------------------------------ ------------ ------------ -------------- -------------- --------------
</TABLE>

         For the full year 2005, in spite of a fuel expense increase of $592
million or 37 per cent, ACE reported operating income of $452 million, an
improvement of $335 million over the same period in 2004. EBITDAR improved $205
million over 2004 Combined. Refer to "Non-GAAP Financial Measures" on page 6 of
this MD&A for additional information on EBITDAR.

         In 2005, total operating revenues increased $930 million or 10 per
cent compared to 2004 Combined. Passenger revenues were up $960 million or 13
per cent reflecting increases in all markets and including the transfer of
Aeroplan passenger revenues into the Passenger revenue category starting in
October 2004. Prior to October 2004, Aeroplan passenger revenues were recorded
in the Other revenue category. In addition, to cover higher fuel costs,
domestic and US transborder fare levels have been increased in 2005 and fuel
surcharges have been significantly increased to and from most international
destinations.

         Operating expenses were up $595 million versus 2004 Combined and
included an increase in fuel expense of $592 million or 37 per cent from 2005.
ASM capacity increased 4 per cent compared to 2004 Combined. Unit cost for
2005, as measured by operating expense per ASM, rose 3 per cent from 2004
Combined. Excluding fuel expense, unit cost in 2005 was down 4 per cent. Unit
cost reductions included aircraft rent, benefits expense, commissions, salaries
and wages expense and food, beverages and supplies.

         For the nine months ended September 30, 2004, reorganization and
restructuring items amounted to $871 million. As Air Canada emerged from CCAA
proceedings on September 30, 2004, reorganization and restructuring items were
not recorded after that date.

         In 2005, non-operating expense decreased $208 million and included a
dilution gain of $190 million (before tax) as a result of the dilution of the
Corporation's interest in Aeroplan relating to the Aeroplan transaction which
was completed in the Second Quarter of 2005 and is further described in Note 13
to the 2005 Annual Consolidated Financial Statements.

         In 2005, gains from revaluation of foreign currency monetary items
amounted to $46 million attributable to a stronger Canadian dollar versus the
US dollar at December 31, 2005 compared to December 31, 2004. In 2004 Combined,
foreign exchange gains on non-compromised monetary items totaled $182 million.


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ACE Aviation Holdings Inc.                                              Page 30
2005 Management's Discussion and Analysis
<PAGE>

         A provision for income taxes of $131 million was recorded in 2005, $28
million of which related to the Aeroplan transaction which took place in the
second quarter of 2005. No tax recovery was recorded on the loss for the first
nine months of 2004. The provision for income taxes in 2004 Combined amounted
to $15 million.

         Net income in 2005 was $258 million compared to a net loss of $880
million in 2004 Combined, an improvement of $1,138 million.

5.3.     Revenue Performance - 2005 versus 2004 Combined

Passenger Revenues

         The table below describes, by major market, excluding the impact of
the policy change related to Aeroplan passenger revenues, year-over-year
percentage changes in passenger revenues, capacity as measured by ASMs, traffic
as measured by RPMs, passenger load factor as measured by RPMs divided by ASMs,
yield as measured by passenger revenue per RPM, and RASM as measured by
passenger revenue per ASM.

<TABLE>
<CAPTION>

                                              Operating Statistics
                                              --------------------
                                             2005 versus 2004 Combined
                                             -------------------------
------------------------- -------------- -------------- --------------- -------------- --------------- --------------
                            Passenger      Capacity        Traffic        Passenger        Yield           RASM
                             Revenue        (ASMs)          (RPMs)       Load Factor      per RPM        % Change
                            % Change       % Change        % Change       pp Change       % Change
------------------------- -------------- -------------- --------------- -------------- --------------- --------------
<S>                            <C>            <C>            <C>             <C>            <C>             <C>
Canada                         13             4              8               3.2            5               9
US                             2             (4)             5               6.0           (3)              6
Atlantic                       10             6              9               1.9            1               4
Pacific                        8              6              6              (0.4)           3               2
Other                          16             12             14              1.4            2               4
------------------------- -------------- -------------- --------------- -------------- --------------- --------------
System                         10             4              8               2.7            2               6
(excluding Aeroplan)
------------------------- -------------- -------------- --------------- -------------- --------------- --------------
System                         13             4              8               2.7            5               9
(including Aeroplan)
------------------------- -------------- -------------- --------------- -------------- --------------- --------------
</TABLE>

         As compared to 2004 Combined, system passenger revenues, which
included Aeroplan passenger revenues of $290 million for the full year 2005 and
$41 million for the fourth quarter of 2004, were up $960 million or 13 per
cent.

         In 2005, system passenger traffic rose 8 per cent on a 4 per cent
increase in ASM flying capacity producing a 2.7 percentage point improvement in
passenger load factor versus the 2004 Combined level. Increases in yield for
the domestic and other international markets were partly offset by a decline in
yield in the US transborder market, reflecting an extremely competitive US
transborder market and a weaker US dollar which lowers the Canadian dollar
value of revenues from the US. To partially offset the large spike in fuel
prices, domestic fares were increased significantly in 2005, while fuel
surcharges were added on international routes. System RASM, excluding Aeroplan
passenger revenues, rose 6 per cent in 2005, mainly reflecting both the
improvement in passenger load factor and the increase in system yield.


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ACE Aviation Holdings Inc.                                              Page 31
2005 Management's Discussion and Analysis
<PAGE>




Domestic Passenger Revenues            Components of Domestic Passenger Revenues
                                              % change 2005 vs 2004 Combined


Year                     $M                                              %
----                   -------                                        -------
2001                   3,582                Traffic (RPMs)               8
2002                   3,535                Capacity (ASMs)              4
2003                   2,919                Load factor (pp)            3.2
2004 (Comb.)           2,931                RASM                         9
2004 (Comb.) (1)       2,949                RASM (1)                     13
2005                   3,310                Yield per RPM                5
2005 (1)               3,447                Yield per RPM (1)            8
____________                               ____________
(1)  Including Aeroplan                    (1)  Including Aeroplan
     Passenger Revenue                          Passenger Revenue

                  [tabular presentation of graphic displays]



         In 2005, domestic passenger revenues, which included Aeroplan
passenger revenues of $137 million for the full year 2005 and $18 million for
the fourth quarter of 2004, were up $498 million or 17 per cent from 2004
Combined. Domestic passenger traffic grew 8 per cent on an ASM capacity
increase of 4 per cent resulting in a passenger load factor improvement of 3.2
percentage points over the 2004 Combined level. Domestic yield increased 5 per
cent in 2005, excluding Aeroplan passenger revenues, mainly due to increased
fare levels to cover higher fuel costs, an improved domestic competitive
position, as well as a stronger market for the higher priced Tango Plus
product. Reflecting both the improvement in passenger load factor and the
increase in yield, excluding Aeroplan passenger revenues, domestic RASM rose 9
per cent above 2004 Combined.

US Transborder Passenger Revenues    Components of US Transborder Pass. Revenues
                                          % change 2005 vs 2004 Combined


Year                      $M                                             %
----                  ---------                                       -------
2001                    2,118            Traffic (RPMs)                  5
2002                    1,945            Capacity (ASMs)                (4)
2003                    1,578            Load factor (pp)               6.0
2004 (Comb.)            1,470            RASM                            6
2004 (Comb.) (1)        1,481            RASM (1)                        10
2005                    1,500            Yield per RPM                  (3)
2005 (1)                1,570            Yield per RPM (1)               1
______________                           _______________
(1)  Including Aeroplan                  (1)  Including Aeroplan
     Passenger Revenues                       Passenger Revenues


                  [tabular presentation of graphic displays]


         US transborder passenger revenues, which included Aeroplan passenger
revenues of $70 million for the full year 2005 and $11 million for the fourth
quarter of 2004, increased $89 million or 6 per cent from the 2004 Combined
level. In response to increased capacity from US carriers, US transborder ASM
capacity was reduced by 4 per cent. In spite of the ASM capacity reduction,
traffic increased 5 per cent resulting in a passenger load factor improvement
of 6.0 percentage points. Excluding Aeroplan passenger revenues, yield declined
3 per cent reflecting the weakening of the US dollar for sales denominated in
US dollars as well as an aggressive pricing environment resulting from
increased capacity in the US transborder market by Canadian low-cost carriers.
Excluding Aeroplan passenger revenues, US


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ACE Aviation Holdings Inc.                                              Page 32
2005 Management's Discussion and Analysis
<PAGE>


transborder RASM was up 6 per cent as the large improvement in passenger load
factor more than offset the yield decrease.


Atlantic Passenger Revenues            Components of Atlantic Passenger Revenues
                                              % change 2005 vs 2004 Combined


Year                       $M                                               %
----                    -------                                          ------
2001                     1,398             Traffic (RPMs)                  9
2002                     1,556             Capacity (ASMs)                 6
2003                     1,472             Load factor (pp)               1.9
2004 (Comb.)             1,524             RASM                            4
2004 (Comb.) (1)         1,530             RASM (1)                        6
2005                     1,676             Yield per RPM                   1
2005 (1)                 1,727             Yield per RPM (1)               4
_____________                              ______________
(1)  Including Aeroplan                    (1)  Including Aeroplan
     Passenger Revenues                         Passenger Revenues


                 [tabular presentation of graphic displays]


         Atlantic passenger revenues, which included Aeroplan passenger
revenues of $51 million for the full year 2005 and $6 million for the fourth
quarter of 2004, increased $197 million or 13 per cent in 2005 from the 2004
Combined level. Despite the increase in fuel surcharges to cover higher fuel
costs, yield only increased 1 per cent, excluding Aeroplan passenger revenues,
reflecting a significant weakening of currencies for sales denominated in Euro
and Sterling Pound as well as competitive pricing environment due to growth in
charter capacity to Europe and the United Kingdom. Atlantic traffic grew 9 per
cent reflecting a strong market demand in the United Kingdom and France
markets, as well as the addition of the route to Rome, Italy. Capacity was
increased 6 percent largely due to the addition of the Rome route and
additional frequencies to the United Kingdom, France and Switzerland. Excluding
Aeroplan passenger revenues, RASM was up 4 per cent reflecting the improvement
in the passenger load factor and, to a much lesser extent, the yield increase.


Pacific Passenger Revenues             Components of Pacific Passenger Revenues
                                              % change 2005 vs 2004 Combined


Year                       $M                                              %
----                     ------                                        --------
2001                      723             Traffic (RPMs)                  6
2002                      802             Capacity (ASMs)                 6
2003                      502             Load factor (pp)              (0.4)
2004 (Comb.)              852             RASM                            2
2004 (Comb.) (1)          854             RASM (1)                        3
2005                      924             Yield per RPM                   3
2005 (1)                  934             Yield per RPM (1)               4
_____________                             _____________
(1)  Including Aeroplan                   (1)  Including Aeroplan
     Passenger Revenues                        Passenger Revenues


                  [tabular presentation of graphic displays]



         Pacific passenger revenues, which included Aeroplan passenger revenues
of $10 million for the full year 2005 and $2 million for the fourth quarter of
2004, were up $80 million or 9 per cent versus 2004 Combined. Excluding
Aeroplan passenger revenues, yield improved 3 per cent from the 2004 Combined


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ACE Aviation Holdings Inc.                                              Page 33
2005 Management's Discussion and Analysis
<PAGE>


level due to increased fuel surcharges in 2005 to cover higher fuel costs as
well as yield improvements in the Hong Kong and Korea markets due to an
increased proportion of higher-yielding business travelers. Pacific traffic and
ASM capacity both rose 6 per cent resulting in a passenger load factor
essentially unchanged from 2004 Combined. Capacity increases were mostly
reflected in the China market, which saw the introduction of non-stop
Toronto-Beijing and Toronto-Seoul services. Excluding Aeroplan passenger
revenues, RASM rose 2 per cent as a result of the yield increase, despite a
negative currency impact caused by the stronger Canadian dollar versus the
Japanese yen.


  Other Passenger Revenues                Components of Other Passenger Revenues
                                              % change 2005 vs 2004 Combined


Year                        $M                                               %
----                      ------                                          ------
2001                       302             Traffic (RPMs)                   14
2002                       352             Capacity (ASMs)                  12
2003                       387             Load factor (pp)                1.4
2004 (Comb.)               491             RASM                              4
2004 (Comb.) (1)           495             RASM (1)                          7
2005                       569             Yield per RPM                     2
2005 (1)                   591             Yield per RPM (1)                 5
_______________                            _________________
(1)  Including Aeroplan                    (1)  Including Aeroplan
     Passenger Revenues                         Passenger Revenues


                  [tabular presentation of graphic displays]



         South Pacific, Caribbean, Mexico and South America (Other) passenger
revenues, which included Aeroplan passenger revenues of $22 million for the
full year 2005 and $4 million for the fourth quarter of 2004, increased $96
million or 19 per cent in 2005. Traffic grew 14 per cent on an ASM capacity
increase of 12 per cent resulting in a 1.4 percentage point improvement in
passenger load factor compared to the 2004 Combined level. Excluding Aeroplan
passenger revenues, yield was up 2 per cent over 2004 Combined in part due to
increased fuel surcharges to cover higher fuel costs. RASM increased 4 per cent
reflecting both the passenger load factor improvement and, to a lesser extent,
the yield increase. The growth in these markets was largely from additional
flying to South America, including Lima, Caracas and Bogota.



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ACE Aviation Holdings Inc.                                              Page 34
2005 Management's Discussion and Analysis
<PAGE>



Cargo Revenues

         Cargo revenues increased $64 million or 12 per cent mainly due to the
addition of two freighter aircraft in 2005 and greater cargo volumes notably in
the Pacific market. With the introduction of Shanghai and the full year effect
of Frankfurt freighter operations, freighter revenues increased $98 million
over 2004. This was partially offset by lower non-freighter revenues due to the
retirement of the Boeing 747-400 Combi aircraft in late 2004. Yield per revenue
ton mile was essentially unchanged from the 2004 Combined level. The favourable
yield impact of increased fuel surcharges in 2005 was largely offset by the
relative growth in lower-yielding long-haul freight traffic and unfavourable
foreign exchange versus 2004 Combined.

            Cargo Revenues

Year                                 $M
----                              --------
2001                                578
2002                                585
2003                                519
2004 (Comb.)                        556
2005                                620

[tabular presentation of graphic display]




Other Revenues

         Non-transportation revenues were down $94 million or 9 per cent mainly
as a result of the change in accounting policy for the loyalty program
(Aeroplan) effective October 1, 2004, as described on page 8 of this MD&A. For
the nine months ended September 30, 2004, Aeroplan revenues from Miles earned
by members through the loyalty program partners amounted to $173 million and
were recorded in the Other revenue category. For the fourth quarter of 2004 and
the full year 2005, Aeroplan revenues from Miles redeemed for air travel on Air
Canada and Jazz are recorded in the Passenger revenue category. Partly
offsetting the reduction from the change in accounting policy for the loyalty
program was an increase in cancellation and change fees, higher third party
maintenance revenues and various other increases.



-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 35
2005 Management's Discussion and Analysis
<PAGE>


5.4.  Cost Performance - 2005 versus 2004 Combined

Impact of the Adoption of AcG-15

         For the full year 2005, the net impact of adopting AcG-15 on the
Corporation's results was a pre-tax charge of $42 million or $0.43 per share,
basic. The impact of the adoption of AcG-15 was a reduction to aircraft rent
expense of $120 million, an increase to depreciation expense of $86 million, an
increase to net interest expense of $88 million, a foreign exchange gain of $26
million and a non-controlling interest charge of $14 million compared to
financial results had AcG-15 not been effective.

Operating Expenses

         For the full year 2005, operating expenses increased $595 million or 7
per cent compared to 2004 Combined and included a fuel expense increase of $592
million or 37 per cent. Unit cost increased 3 per cent versus the 2004 Combined
level. Excluding fuel expense, unit cost declined 4 per cent in 2005.


                                   Unit Cost


                                             cents per ASM

                                                     Operating expense per ASM,
Year                    Operating expense per ASM      excluding fuel expense
----                    -------------------------      ----------------------
2001                               17.1                         14.4
2002                               16.6                         14.5
2003                               16.7                         14.4
2004 (combined)                    15.5                         12.7
2005                               15.9                         12.2

                  [tabular presentation of graphic display]





2005 Operating Expenses
% 0f total


Operating Expense                                                 %
-----------------                                               -------
Salaries, wages and benefits                                      27
Aircraft fuel                                                     23
Aircraft rent                                                     4
Airport and navigation fees                                       10
Aircraft maintenance, materials and supplies                      4
Communications and information technology                         3
Food, beverage and supplies                                       4
Depreciation, amortization and obsolescence                       5
Commissions                                                       3
Other                                                             17

                  [tabular presentation of graphic display]



-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 36
2005 Management's Discussion and Analysis
<PAGE>


         The following discussion summarizes those categories with significant
year-over-year variances:

         Salaries and wage expense totaled $1,978 million in 2005, an increase
of $43 million or 2 per cent from the 2004 Combined level. Included in salaries
and wages were expenses relating to employee profit sharing programs in 2005.
The average number of full-time equivalent (FTE) employees in 2005 was
essentially unchanged from 2004 Combined. Employee productivity, as measured by
ASM per FTE employee, grew 4 per cent compared to the 2004 Combined level.

         Employee benefits expense amounted to $542 million in 2005, a decrease
of $108 million or 17 per cent from 2004 Combined. The decrease was largely due
to lower pension and employee future benefits expenses as a result of the
elimination of unamortized actuarial losses and prior service costs resulting
from fresh start reporting.

         Fuel expense increased $592 million or 37 per cent, on a capacity
increase of 4 per cent, reflecting continuing record high fuel prices. The
average base fuel price increase of $659 million and the volume-related
increase of $89 million were partially offset by a reduction of $159 million
due to the favourable impact of a stronger Canadian dollar versus the US dollar
during the year. Beginning in September 2005, the Corporation has implemented a
systematic fuel risk management strategy and has entered into contracts with
financial intermediaries to manage its exposure to jet fuel price volatility. A
fuel hedging loss of $3 million relating to these contracts was recorded in the
fourth quarter of 2005. Prior to these derivative instruments being designated
as hedges for accounting purposes, an unrealized gain of $2 million was
recorded in other non-operating expense. On a unit cost basis, fuel expense per
ASM rose 32 per cent.

         Aircraft rent expense was down $215 million or 34 per cent versus 2004
Combined largely due to the adoption of AcG-15, the impact of fair value
adjustments as a result of fresh start reporting, the termination of Boeing
747-400 leases, the net reclassification of certain aircraft leases from
operating to capital leases, lease renegotiations, as well as a stronger
Canadian dollar versus the US dollar for leases denominated in US dollars when
compared to 2004 Combined. These decreases were partly offset by aircraft
additions to the fleet, net of aircraft returns or terminations.

         Airport and navigation fees increased $110 million or 14 per cent on a
1 per cent increase in aircraft departures. Higher landing and general terminal
fees, primarily at Toronto's Pearson International Airport, and higher fees for
air navigation services as a result of a 10 per cent average unit rate increase
which came into effect in September 2004, were the main reasons for the
increase. In addition, in the third quarter of 2004, the Corporation recorded a
favourable adjustment of $22 million to airport and navigation fees relating to
Federal Aviation Administration (FAA) overflight fees.


-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 37
2005 Management's Discussion and Analysis
<PAGE>

         Aircraft maintenance, materials and supplies expense increased $24
million or 7 per cent. The increase is mainly due to the timing of engine
maintenance activities, to the contracting out of heavy aircraft maintenance
activities to outside maintenance, repair and overhaul (MRO) companies as ACTS,
Air Canada and Jazz's primary MRO service provider, was operating at full
capacity, and to the addition of Bombardier regional jet aircraft to the Jazz
fleet. This increase was partly offset by the impact of the retirement of the
BAe 146 aircraft fleet. The contracting out of maintenance activities to MRO
companies resulted in increased aircraft maintenance, materials and supplies
expense as all expenses (including labour) relating to the services purchased
were included in this expense category.

         Communications and information technology expense increased $1 million
from the 2004 level. Increased volume for communication services for web and
Global Distribution System (GDS) as well an increase in information technology
projects were offset by renegotiated contract rates for information technology
and communications services and by the impact of a stronger Canadian dollar
versus the US dollar when compared to 2004 Combined.

         Food, beverage and supplies expense decreased $6 million or 2 per cent
versus the 2004 Combined level on a passenger traffic increase of 8 per cent.
The impact of the cost reduction initiatives and the new catering and
buy-on-board programs implemented by the Corporation more than offset the
volume-related and the international service improvement increases.

         When compared to 2004 Combined, depreciation, amortization and
obsolescence expense was up $85 million or 21 per cent in 2005 largely related
to the adoption of AcG-15.

         In 2005, commission expense was down $52 million or 17 per cent on
combined passenger and cargo revenue growth of 10 per cent, excluding Aeroplan
passenger revenues. The impact of a new commission structure introduced for web
and GDS bookings as well as lower international commissions more than offset
the volume-related increase.

         The other operating expense category rose $121 million or 8 per cent
over the 2004 Combined level and included increases in credit card fees,
advisory fees, customer inconvenience and baggage mishandling expenses,
Aeroplan non-air redemption expenses, a higher volume and an increase in the
cost of tour packages by Air Canada Vacations, as well as other categories of
expenses mainly related to the 4 per cent growth in capacity. These increases
were partly offset by a reduction in advertising and promotion expense and
reductions in other categories.

Non-Operating Expense

         Non-operating expense amounted to $85 million in 2005, a $208 million
decrease over 2004 Combined. In the second quarter of 2005, ACE recorded a
dilution gain of $190 million (before tax) as a result of the dilution of its
interest in Aeroplan. Net interest expense amounted to $235 million in 2005, an
increase of $25 million from 2004 Combined. Interest expense rose $86 million
and included the impact of the adoption of AcG-15 of $88 million. Interest
income totaled $66 million in 2005, up $49 million from the 2004 Combined level
primarily related to higher cash balances and an increase in average interest
rates. In addition, in 2004 Combined, prior to emergence from CCAA on September
30, 2004,


-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 38
2005 Management's Discussion and Analysis
<PAGE>


interest income of $17 million was allocated to reorganization and
restructuring items. Included in other non-operating expenses in 2005 was a
charge of $29 million relating to the repayment of the GE exit credit facility
and income of $17 million related to a settlement of interest rate swaps on
aircraft leases.

         In 2005, loss on sale of and provision on assets of $28 million was
recorded of which approximately $15 million related to the write-down of
inactive Boeing 747 inventory. In 2004 Combined, the Corporation recorded
provisions of $75 million relating mainly to non-operating aircraft, including
$18 million for spare parts.

Foreign Exchange

         Gains from revaluation of foreign currency monetary items amounted to
$46 million in 2005 attributable to a stronger Canadian dollar versus the US
dollar at December 31, 2005 compared to December 31, 2004. The foreign exchange
gains recorded in 2005 included gains of $40 million related to capital lease
obligations and $26 million resulting from the adoption of AcG-15. This
compared to foreign exchange gains on non-compromised monetary items of $182
million recorded in 2004 Combined.

Future Income Taxes

         Provision for income taxes totaled $131 million in 2005, of which $28
million related to the Aeroplan transaction which took place in the second
quarter of 2005. The Corporation recorded a provision for income taxes of $15
million in 2004 Combined. No tax recovery was recorded on the loss in 2004 in
the Predecessor Company. Refer to Note 8 to the 2005 Annual Consolidated
Financial Statements of ACE for additional information on future income taxes.



-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 39
2005 Management's Discussion and Analysis
<PAGE>


6. THE STATEMENT OF FINANCIAL POSITION AND LIQUIDITY

         The consolidated statements of financial position as at December 31,
2005 and December 31, 2004 represent the accounts of ACE and its subsidiaries
on a post-emergence fresh start reporting basis, as further described in Notes
2 and 20 to the 2005 Annual Consolidated Financial Statements. The consolidated
statement of financial position as of December 31, 2003 represents the accounts
of the Predecessor Company. In accordance with CICA 1625, prior period
financial information has not been restated to reflect the impact of fair value
adjustments and, accordingly, amounts in the Predecessor Company are not
directly comparable.

<TABLE>
<CAPTION>

                                  Condensed Consolidated Statement of Financial Position
                                  ------------------------------------------------------
----------------------------------------------- ------------------------ ----------------------- ------------------------
                                                          ACE                     ACE              Predecessor Company
 ($ millions)                                    At December 31, 2005     At December 31, 2004    At December 31, 2003
----------------------------------------------- ------------------------ ----------------------- ------------------------
<S>                                                               <C>                     <C>                      <C>
ASSETS
Current
Cash, cash equivalents and
short-term investments                                            2,181                   1,632                      670
Other current assets                                              1,173                   1,063                    1,041
                                                ------------------------ ----------------------- ------------------------
                                                                  3,354                   2,695                    1,711

Property and equipment                                            5,494                   3,684                    1,700
Deferred charges                                                    145                     167                    2,340
Goodwill                                                              -                       -                      510
Intangible assets                                                 2,462                   2,703                      164
Other assets                                                        392                     137                      485
                                                ------------------------ ----------------------- ------------------------
                                                                 11,847                   9,386                    6,910
                                                ======================== ======================= ========================

LIABILITIES
Current liabilities                                               3,011                   2,616                    2,402
Long-term debt and capital lease obligations                      3,543                   2,328                      332
Convertible preferred shares                                        148                     132                        -
Future income taxes                                                 221                     243                       11
Pension and other benefit liabilities                             2,154                   2,344                      964
Non-controlling interest                                            203                       -                        -
Deferred credits                                                      -                       -                      827
Other long-term liabilities                                       1,399                   1,520                    1,216
                                                ------------------------ ----------------------- ------------------------
                                                                 10,679                   9,183                    5,752
Liabilities subject to compromise                                     -                       -                    5,313
                                                ------------------------ ----------------------- ------------------------
                                                                 10,679                   9,183                   11,065
SHAREHOLDERS' EQUITY
Share capital and other equity                                      747                     187                      967
Contributed surplus                                                   6                       1                       25
Retained earnings                                                   415                      15                   (5,147)
                                                ------------------------ ----------------------- ------------------------
                                                                  1,168                     203                   (4,155)
                                                ------------------------ ----------------------- ------------------------
                                                                 11,847                   9,386                    6,910
                                                ======================== ======================= ========================

----------------------------------------------- ------------------------ ----------------------- ------------------------
</TABLE>

         As a result of the adoption of AcG-15 effective January 1, 2005, Air
Canada consolidated the financial statements of certain aircraft and engine
leasing entities and fuel facilities corporations. As at December 31, 2005,
additional property and equipment of $1,333 million, long-term debt, including
current portion, of $1,178 million, other assets of $112 million, and
non-controlling interest of $203 million are consolidated under AcG-15. The
impact of the adoption of AcG-15 on the consolidated statement of financial
position is described in further detail in Note 2 to the 2005 Annual
Consolidated Financial Statements of ACE.


-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 40
2005 Management's Discussion and Analysis
<PAGE>


6.1.   Share Capital and Other Equity

         At December 31, 2005, the issued and outstanding common shares of ACE,
along with common shares potentially issuable, which are comprised of
convertible preferred shares, convertible notes and stock options, are as
follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
                                                                              ACE
                                                        At December 31, 2005    At December 31, 2004
                                                        ------------------------------------------------
                                          Authorized                   Outstanding (000)
--------------------------------------------------------------------------------------------------------
<S>                                       <C>                        <C>                         <C>
Issued and outstanding common shares
  Class A variable voting shares          Unlimited                  76,735                      74,813
  Class B voting shares                   Unlimited                  25,059                       8,813
  Shares held in escrow                                                  28                       5,189
                                                        ------------------------------------------------
Total issued and outstanding common share                           101,822                      88,815
--------------------------------------------------------------------------------------------------------



--------------------------------------------------------------------------------------------------------
                                                                              ACE
                                                        At December 31, 2005    At December 31, 2004
                                                        ------------------------------------------------
                                                                       Outstanding (000)
--------------------------------------------------------------------------------------------------------
Common shares potentially issuable
  Convertible preferred shares                                       10,228                    9,375
  Convertible notes                                                   6,875                        -
  Stock options                                                       3,187                    3,028
                                                              ---------------------------------------
Total common shares potentially issuable                             20,290                   12,403
--------------------------------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
 ($ millions)                                                               ACE
                                                        At December 31, 2005    At December 31, 2004
                                                        ------------------------------------------------
                                                                       Outstanding (000)
--------------------------------------------------------------------------------------------------------
<S>                                                               <C>                      <C>
Common shares                                                     $   2,231                $   1,778
Convertible preferred shares                                            117                      117
Convertible notes                                                        92                        -
                                                              ---------------------------------------
                                                                      2,440                    1,895
Adjustment to shareholders' equity (1)                              (1,693)                  (1,708)
                                                              ---------------------------------------
Share capital and other equity                                     $    747                 $    187
--------------------------------------------------------------------------------------------------------
</TABLE>

    (1 Under fresh start reporting, the balance in shareholders' equity after
    a comprehensive revaluation is adjusted to the net value of identifiable
    assets and liabilities. CICA 1625 - Comprehensive Revaluation of Assets
    and Liabilities, does not permit goodwill to be recorded even if the fair
    value of net assets is less than the fair value of the enterprise as a
    whole.


          During the second quarter of 2005, ACE completed the public offering
of an aggregate of 12,485,000 Class A Variable Voting Shares and Class B Voting
Shares at a price of $37.00 per share for gross proceeds of approximately $462
million ($442 million, net of fees).

         In the same period, ACE issued $330 million of 4.25 per cent
Convertible Senior Notes due 2035 (Convertible Notes) for net proceeds of $319
million. At the date of issuance, the value ascribed to the holders' conversion
option, which is presented as equity, was $94 million less allocated fees of $2
million. The value ascribed to the financial liability was $236 million.

         The Corporation used approximately $557 million of the aggregate net
cash proceeds of the offerings to repay all of its outstanding debt under the
exit credit facility with GE, including $16 million for early payment fees. The
Corporation recorded a charge of $29 million in other non-operating expenses
for this transaction in the three months ended June 30, 2005, including $13
million for the write-off of deferred financing charges.


-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 41
2005 Management's Discussion and Analysis
<PAGE>

         The Court-appointed Monitor for the restructuring of the Predecessor
Company under the CCAA completed its report on May 30, 2005 confirming that all
remaining disputed unsecured claims had been resolved and recommended to the
Ontario Superior Court of Justice that it authorize the Monitor to proceed with
the final distribution of shares held by the Monitor in escrow in accordance
with the restructuring plan. The shares were distributed with the exception of
27,927 shares that continue to be held in escrow by the Monitor pending
resolution of tax obligations with governmental authorities.

6.2.   Liquidity and Working Capital

         At December 31, 2005, the Corporation had cash, cash equivalents and
short term investments of $2,181 million and positive working capital of $343
million. At December 31, 2004, the Corporation had cash, cash equivalents and
short-term investments of $1,632 million and positive working capital of $79
million.

Air Canada

         On April 6, 2005, Air Canada entered into a senior secured syndicated
revolving credit facility in an aggregate amount of up to $300 million or the
US dollar equivalent. The revolving credit facility has a two-year term which
can be extended at Air Canada's option for additional one-year periods on each
anniversary of closing, subject to prior approval by a majority of the lenders.
Included in the aggregate amount is a swing line facility of up to $20 million
provided for cash management and working capital purposes. The amount available
to be drawn by Air Canada under the revolving credit facility is limited to the
lesser of $300 million and the amount of a borrowing base determined with
reference to certain eligible accounts receivable of Air Canada and certain
eligible owned and leased real property of Air Canada. At December 31, 2005, no
amount was drawn under this facility. The credit facility is secured,
principally, by a first priority security interest and hypothec over the
present and after-acquired property of Air Canada, subject to certain
exclusions and permitted encumbrances.

Aeroplan

         During 2005, Aeroplan arranged for senior secured credit facilities in
the amount of $475 million. The credit facilities consist of one $300 million
(or the U.S. dollar equivalent thereof) term facility (Term A Facility), a $100
million (or the U.S. dollar equivalent thereof) acquisition facility (Term B
Facility) and a $75 million (or the U.S. dollar equivalent thereof) revolving
term credit facility. The Term A Facility was drawn on June 29, 2005 in the
amount of $300 million, in order to fund a portion of the $400 million Aeroplan
miles redemption reserve. Refer to Note 13 to the 2005 Annual Consolidated
Financial Statements for additional information. The Term B Facility is
available for multiple drawings to fund permitted acquisitions. Under the
revolving facility, $18 million was drawn on June 29, 2005 for general
corporate and working capital purposes, and was repaid during the third quarter
of 2005. At December 31, 2005, there were no amounts drawn under the Term B
facility. Refer to Note 7 to the 2005 Annual Consolidated Financial Statements
for additional information on the Aeroplan credit facilities.


-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 42
2005 Management's Discussion and Analysis
<PAGE>

6.3.  Debt and Lease Obligations

         As a result of the adoption of AcG-15, the Corporation has
consolidated leasing entities covering aircraft and engine leasing agreements
previously accounted for as operating leases. Future minimum lease payments
under existing operating leases of aircraft and other property, excluding
leases accounted for as capital leases and Variable Interest Entities (VIEs),
amounted to $3.4 billion at December 31, 2005 compared to $3.3 billion at
December 31, 2004. Refer to the table below for additional information on the
Corporation's future minimum lease payments under existing operating leases.

Summary of Principal Repayment and Future Minimum Lease Payment Requirements
at December 31, 2005

         The table below summarizes the Corporation's principal repayment
requirements at December 31, 2005 through to 2010 on long-term debt, capital
lease obligations, and aircraft, engine and fuel facility debt consolidated as
VIEs under AcG-15. The table also summarizes the Corporation's future minimum
lease payments under existing operating leases at December 31, 2005.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------

($ millions)                                           2006       2007      2008     2009      2010
                                                    ------------------------------------------------

<S>                                                      <C>        <C>       <C>     <C>        <C>
Long-term debt principal obligations                     48         50        70      349        35
Debt consolidated under AcG-15 (1)                       76        119       117       59       118
Capital lease principal obligations                     141        174       172       84        82
                                                    ------------------------------------------------
Total long-term debt and capital lease obligations      265        343       359      492       235
                                                    ================================================

Future minimum lease payments under                     458        406       335      300       259
existing aircraft operating  leases

Future minimum lease payments under
existing leases for other property                       83         68        51       37        28
                                                    ------------------------------------------------
Total future minimum lease payments
under existing leases                                   541        474       386      337       287
                                                    ================================================
----------------------------------------------------------------------------------------------------
</TABLE>

(1) Includes end of lease debt principal payments due on aircraft and engine
leasing entities consolidated under AcG-15 before taking into account the
anticipated fair value of the aircraft and engines at the time of lease expiry.
In 2007, amounts due of approximately US$39 million relate to end of lease
obligations with current aircraft fair values of approximately US$36 million.
In 2008, amounts due of approximately US$51 million relate to end of lease
obligations with current aircraft fair values of approximately US$93 million.
In 2010, amounts due of approximately US$54 million relate to end of lease
obligations with current aircraft fair values of approximately US$59 million.
In these leasing transactions, Air Canada has the option to either refinance
the aircraft on lease expiry or to return the aircraft to the lessor. On a
lease return, Air Canada may be required to make a residual value payment in
the event aircraft sale proceeds are less than amounts outstanding under the
lease.

-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 43
2005 Management's Discussion and Analysis
<PAGE>

 6.4. Capital Expenditures

         The table below provides projections for aircraft expenditures for
firm aircraft orders, net of aircraft financing, combined with planned and
committed expenditures for aircraft engines, inventory, property and equipment,
net of related financing, if applicable, for the years 2006 through to 2010.

          In addition to the firm aircraft orders, the Corporation's purchase
agreements include options, cancelable orders and purchase rights, all of which
are not included in these projections.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
Projected Planned and Committed Capital Expenditures (1)
                                                           ------------------------------------------------------
($ millions)                                                    2006       2007       2008       2009       2010
                                                           ------------------------------------------------------
<S>                                                              <C>      <C>        <C>          <C>        <C>
Projected committed expenditures                                 826      1,950      1,213        428        837

Projected planned but uncommitted expenditures                   252        405        317        273        285
                                                           ------------------------------------------------------
Total projected expenditures                                   1,078      2,355      1,530        701       1122

Projected financing on committed expenditures                   (467)    (1,560)    (1,090)      (297)      (801)
                                                           ------------------------------------------------------

Total projected expenditures, net of financing                   611        795        440        404        321
                                                           ======================================================
-----------------------------------------------------------------------------------------------------------------
</TABLE>

(1) US dollar amounts are converted using the December 31, 2005 noon day rate
of $1.1659. Final aircraft delivery prices include estimated escalation and,
where applicable, deferred price delivery payment interest calculated based on
the 90-day LIBOR rate at December 31, 2005.

Boeing

         In November 2005, the Corporation concluded agreements with The Boeing
Company (Boeing) for the acquisition of up to 36 Boeing 777 aircraft and up to
60 Boeing 787 Dreamliners. The agreements include firm orders for 18 Boeing 777
aircraft, plus purchase rights for an additional 18 aircraft, in a yet-to-be
determined mix of the 777 family's newest models. Deliveries of the Boeing 777
aircraft are scheduled to commence in March 2007. Seven Boeing 777 aircraft are
expected to be delivered in 2007, nine aircraft in 2008, and two aircraft in
2009. The agreements also include firm orders for 14 Boeing 787 Dreamliners,
plus options and purchase rights for an additional 46 aircraft. Air Canada's
first Boeing 787 aircraft is scheduled for delivery in 2010. The Corporation
has received financing commitments from Boeing and the engine manufacturer
covering all firm aircraft orders for approximately 90 per cent of the capital
expenditure.

         The Corporation expects to remove from operations all 20 Airbus A330
and A340 aircraft as well as all 12 Boeing 767-200 aircraft as the new
committed Boeing 777 and 787 aircraft are delivered. The debt and other
obligations associated with these aircraft are approximately US$850 million at
December 31, 2005.


-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 44
2005 Management's Discussion and Analysis
<PAGE>


Embraer

         In 2004, Air Canada signed a definitive purchase agreement with
Empresa Brasileira de Aeronautica S.A. (Embraer) covering firm orders for 45
Embraer 190 series aircraft as well as 15 Embraer 175 series aircraft. The
purchase agreement also contains rights to exercise options for up to 60
additional Embraer 190 series aircraft as well as providing for conversion
rights to other Embraer models.

         Deliveries of the 15 Embraer 175 series aircraft commenced in July
2005 and the last aircraft was delivered in January 2006. All Embraer 175
deliveries were 80 percent financed by a third party.

         The Embraer 190 series deliveries commenced in December 2005. At
December 31, 2005, three of the Embraer 190 series firm aircraft orders have
been completed and the remaining 42 deliveries are planned to be completed by
January 2008. For the first 18 firm Embraer 190 deliveries, the Corporation has
received loan commitments from a syndicate of banks and the manufacturer
covering 80 percent of the capital expenditure. For the remaining 27 firm
Embraer 190 deliveries, the Corporation has received loan commitments from the
manufacturer covering 85 percent of the capital expenditures.

Bombardier

         In 2004, Air Canada signed a definitive purchase agreement with
Bombardier Inc. (Bombardier) for the acquisition of regional jet aircraft. The
agreement with Bombardier covered firm orders for 15 Bombardier CRJ705 and 15
Bombardier CRJ200 aircraft, all of which were delivered to the Corporation in
late 2004 and throughout 2005. The agreement with Bombardier contains orders
for 15 additional Bombardier CRJ200 aircraft which can be cancelled without
penalty. The agreement also contains options for an additional 45 aircraft. As
of February 9, 2006, no commitments have been made on the cancelable orders or
on the additional options for the 45 aircraft. The Corporation has financing
commitments for 85 percent of capital expenditures from the manufacturer on the
cancellable aircraft orders should the Corporation decide to commit to acquire
these aircraft.

Aircraft Reconfiguration

         On November 10, 2005, Air Canada announced its intention to provide
all-new seating across its entire fleet, featuring a state-of-the-art lie-flat
seat for its international Executive First customers. In addition, Air Canada
is outfitting its Executive Class cabins on North American routes with new
premium seats, and all of its Hospitality cabins fleet-wide will be
reconfigured with new seats offering personal seat back entertainment systems
with an increased choice of audio and video programming. The capital
expenditures relating to this program are reflected in the projected planned
and committed expenditures table above.


-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 45
2005 Management's Discussion and Analysis
<PAGE>



Projected Cash Debt Payments for Committed Aircraft Deliveries

         The following table provides for the Corporation's cash debt payments
for the future firm aircraft deliveries for the years 2006 through to 2010.

         The projected principal repayments disclosed below are based on the
assumption that all aircraft acquisitions will be financed under debt. Air
Canada has not yet decided whether certain aircraft acquisitions will be
financed under debt or operating lease arrangements

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
($ millions) (1)                                             2006         2007         2008        2009         2010
                                                        --------------------------------------------------------------

<S>                                                             <C>         <C>         <C>         <C>         <C>
Principal repayment on aircraft-related long-term debt          8           37          95          130         154
----------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Based on 10-year US treasury rate and swap rate as at December 31, 2005. US
dollar amounts are converted using the December 31, 2005 noon day rate of
$1.1659. Final aircraft delivery prices include estimated escalation and, where
applicable, deferred price delivery payment interest calculated based on the
90-day LIBOR rate at December 31, 2005.



-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 46
2005 Management's Discussion and Analysis
<PAGE>


6.5. Pension Funding Obligations

         The table below provides the Corporation's 2005 pension funding as
well as projections for its pension funding obligations from 2006 through to
2010:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
($ millions)                                      2005       2006        2007        2008        2009        2010
                                             ----------- ----------- ----------- ----------- ----------- -----------
<S>                                                  <C>        <C>         <C>         <C>         <C>         <C>
Past service domestic  registered plans              99         198         214         207         211         212
Current service domestic registered plans           133         139         141         146         152         158
Other pension arrangements                           52          52          56          61          65          69
                                             ----------- ----------- ----------- ----------- ----------- -----------
Projected pension funding obligations               284         389         411         414         428         439
                                             =========== =========== =========== =========== =========== ===========
--------------------------------------------------------------------------------------------------------------------
</TABLE>

         The above pension funding requirements are in respect of the
Corporation's pension arrangements. For Domestic Registered Plans, the funding
requirements are based on the minimum past service contributions from the
January 1, 2005 actuarial valuations plus a projection of the current service
contributions. The required contributions disclosed above do not reflect actual
experience of 2005 and assume no future gains and losses on plan assets and
liabilities over the projection period. The changes in the economic conditions,
mainly the return on assets generated by the fund and the change in interest
rates, will impact projected required contributions.



-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 47
2005 Management's Discussion and Analysis
<PAGE>

7.  FINANCIAL MANAGEMENT - 2005 VERSUS 2004 COMBINED

         The following table reflects the 2005 Consolidated Statement of Cash
Flow of ACE, and the 2004 Combined Statement of Cash Flow, as defined on page 4
of this MD&A.

<TABLE>
<CAPTION>
                                             Consolidated Statement of Cash Flow
                                             -----------------------------------
---------------------------------------------------------------------------------------------------------------------------
      ($ millions)                                                                   ACE                 2004 Combined
                                                                            ------------------------------------------------
                                                                             Twelve Months ended      Twelve Months ended
Cash flows from (used for)                                                    December 31, 2005        December 31, 2004
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                           <C>                    <C>

Operating
      Income (loss) for the period                                                            258                    (880)

      Adjustments to reconcile to net cash provided by operations
        Reorganization and restructuring items                                                  -                     786
        Depreciation, amortization and obsolescence                                           482                     397
        Loss on sale of and provisions on assets                                               28                      75
        Aeroplan dilution gain                                                               (190)                      -
        Foreign exchange                                                                      (83)                   (202)
        Future income taxes                                                                   116                       6
        Employee future benefit funding (more than) less than expense                         (74)                     74
        Decrease (increase) in accounts receivable                                            (43)                     78
        Decrease (increase) in spare parts, materials and supplies                            (92)                    (30)
        Increase (decrease) in accounts payable and accrued liabilities                        45                    (222)
        Increase (decrease) in advance ticket sales, net of restricted cash                   132                     119
        Aircraft lease payments (in excess of ) less than rent expense                         33                     (45)
        Other                                                                                  63                      92
                                                                           ------------------------------------------------
      Cash flows from (used for) operating activities before the
      following items:                                                                        675                     248
        Settlement of lease obligations                                                         -                    (290)
        Rebate on lease settlement                                                              -                      33
        Payment of restructuring obligation                                                     -                     (45)
        Fees conditional on emergence                                                           -                     (12)
                                                                           ------------------------------------------------
                                                                                              675                     (66)
                                                                           ------------------------------------------------
Financing
      Issue of share capital                                                                  452                       1
      Issue of convertible notes                                                              319                       -
      Issue of Aeroplan subsidiary units                                                      232                       -
      Aircraft-related borrowings                                                             404                     233
      Credit facility borrowings                                                              300                      80
      Reduction of long-term debt and capital lease obligations                              (894)                   (425)
      Preferred shares issued to Cerberus for cash                                              -                     238
      Shares issued for cash under Rights Offering                                              -                     852
      GE DIP financing                                                                          -                       -
      Drawdown of exit financing                                                                -                     527
      Distributions paid to non-controlling interest holders                                   (8)                      -
      Other                                                                                    (4)                     (2)
                                                                           ------------------------------------------------
                                                                                              801                   1,504
                                                                           ------------------------------------------------
Investing
      Short-term investments                                                                 (465)                     35
      Sale of Aeroplan units                                                                   35                       -
      Additions to capital assets                                                            (882)                   (457)
      Proceeds from sale of assets                                                             42                       2
      Cash collateralization of letters of credit                                             (35)                    (21)
      Investment in US Airways                                                                (87)                      -
                                                                           ------------------------------------------------
                                                                                           (1,392)                   (441)
                                                                           ------------------------------------------------

Increase in cash and cash equivalents                                                          84                     997
Cash and cash equivalents, beginning of period                                              1,481                     484
Cash and cash equivalents transferred to the Corporation                                        -                       -
                                                                           ------------------------------------------------
Cash and cash equivalents, end of period                                                    1,565                   1,481
Short-term investments                                                                        616                     151
                                                                           ------------------------------------------------
Total                                                                                       2,181                   1,632
                                                                           ================================================
</TABLE>

-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 48
2005 Management's Discussion and Analysis
<PAGE>


2005 Changes in Cash Position including Short-Term Investments


                                                                  $M
                                                               ---------
Cash flows from operations                                       675
Net equity and debt proceeds                                    1,003
Credit facility borrowings                                       300
Aircraft related borrowings                                      404
Reduction of long-term borrowings                               (894)
Addition to capital assets                                      (882)
Investment in US Airways Group Inc.                              (87)
Other                                                             30
Net increase in cash and short-term investments                  549

                  [tabular presentation of graphic display]




7.1.   Cash Flows from (used for) Operations

         The 2005 cash flows from operations were $675 million. This compared
to cash flows used for operations of $66 million in 2004 Combined. 2004
Combined cash flows used for operations included $314 million of net payments
made on implementation of the consolidated plan of reorganization, compromise
and arrangement (the Plan), relating mainly to the settlement of restructuring
obligations. Before these payments, 2004 Combined cash flows from operations
amounted to $248 million.

         Further components of the cash flow change are described below:

         Accounts receivable was a use of funds of $43 million in 2005. This
compared to a source of funds of $78 million in 2004 Combined, a decrease of
$121 million. The main factor in the use of funds was an increase in commodity
tax receivables on aircraft deliveries which will be collected in the first
quarter of 2006. Another factor in the use of funds included an increase in
cargo-related receivables due mainly to the increase in cargo revenues over
2004 Combined.

         Spare parts, materials and supplies was a use of funds of $92 million,
compared to a use of funds of $30 million in 2004 Combined. The use of funds
reflected increases in spare parts for servicing third party maintenance
contracts as well as spare parts for the Embraer and CRJ aircraft deliveries
during the year. In addition, fuel inventories increased $41 million during the
year, in part reflecting the higher cost of fuel.

         In 2005, employee future benefit funding exceeded the accounting
expense by $74 million.

         Other cash from operations of $63 million during the year included the
change in prepaid expenses and other current assets. In 2005, a prepayment made
while under CCAA was repatriated resulting in a cash inflow of $63 million.


-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 49
2005 Management's Discussion and Analysis
<PAGE>

7.2.  Cash Flows from (used for) Financing Activities

         In 2005, aircraft-related borrowings totaled $404 million and related
mainly to the acquisition of Embraer aircraft.

         In 2005, reduction of long-term debt and capital lease obligations
amounted to $894 million. The Corporation repaid all of its outstanding debt of
$540 million under the exit credit facility with GE and proceeds of $29 million
resulting from the sale of one Boeing 747-400 aircraft were used to repay the
GE Limited Recourse Loan. Scheduled payments of $158 million were made on
capital lease obligations and scheduled payments of $43 million were made on
the secured non-revolving term credit facility with Amex Bank of Canada Inc.
Other mandatory scheduled payments amounted to $124 million.

         In addition, in 2005, ACE completed the public offering of an
aggregate of 12,485,000 Class A Variable Voting Shares and Class B Voting
Shares at a price of $37.00 per share for gross proceeds of approximately $462
million ($442 million, net of fees). The Corporation also issued $330 million
of 4.25 per cent Convertible Senior Notes due 2035 (Convertible Notes) for net
proceeds of $319 million. Also in 2005, ACE and Aeroplan Income Fund (the Fund)
completed an Initial Public Offering of the Aeroplan Income Fund for aggregate
net proceeds of $267 million, of which $232 million is included in financing
activities and $35 million is included in investing activities. The amount of
$35 million included in investing activities relates to the net over-allotment
proceeds which were the sale to the Fund of units held by ACE. Also in 2005,
the Corporation issued 521,976 common shares on the exercise of stock options
for cash consideration of $10 million.

         In 2005, Air Canada entered into a senior secured syndicated revolving
credit facility in an aggregate amount of up to $300 million or the US dollar
equivalent. At December 31, 2005, the full amount available under the credit
facility was undrawn.

         During 2005, Aeroplan arranged for senior secured credit facilities in
the amount of $475 million. The credit facilities consist of one $300 million
(or the U.S. dollar equivalent thereof) term facility (Term A Facility), a $100
million (or the U.S. dollar equivalent thereof) acquisition facility (Term B
Facility) and a $75 million (or the U.S. dollar equivalent thereof) revolving
term credit facility. The Term A Facility was drawn on June 29, 2005 in the
amount of $300 million in order to fund a portion of the $400 million Aeroplan
Miles Redemption Reserve, included in cash and cash equivalents and short-term
investments. At December 31, 2005, no amounts were drawn under the Term B
Facility.


-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 50
2005 Management's Discussion and Analysis
<PAGE>


7.3.  Cash Flows from (used for) Investing Activities

         In 2005, short-term investments increased by $465 million. Short-term
investments have original maturities over three months, but not more than one
year. These investments can be readily converted to cash and are with
institutions that have high credit ratings.


2005 Capital Expenditures

                                              o  In 2005, additions to capital
                                                 assets totaled $882 million.
                                                 Included in this amount were
Capital Expenditures                 $M          $508 million related to the
--------------------               -----         purchase of Embraer aircraft
Aircraft and aircraft-related        765         and $185 million related to a
Project-Development costs             64         deposit for the acquisition of
Facilities                            18         Boeing aircraft partly offset
Ground equipment,                                by a $50 million refund
  computer systems and other          35         relating to deposits on
                                                 Bombardier aircraft which have
[tabular presentation of graphic display]        been delivered. Other additions
                                                 to capital assets included
                                                 inventory and spare engines,
                                                 ground equipment, facilities
                                                 and system development costs.

US Airways Group Inc.

         On September 27, 2005, the Corporation invested $87 million (US$75
million) in US Airways Group Inc. (US Airways) in conjunction with the
carrier's exit from US bankruptcy proceedings. The Corporation's investment
represented approximately 6 per cent of the equity of US Airways at December
31, 2005. The equity investment is subject to a six-month holding period from
the closing date. This investment has been accounted for using the cost method.
In connection with the equity investment, ACE also received options to purchase
additional common stock in US Airways. On closing of the transaction, ACE sold
these options for proceeds of $1 million.


-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 51
2005 Management's Discussion and Analysis
<PAGE>

8.  FLEET

Air Canada

         In 2005, Air Canada took delivery of one Airbus A340-300 aircraft,
three Boeing 767-300 aircraft, 14 Embraer 175 and three Embraer 190 aircraft.
During 2005, three Airbus A321 aircraft and one Airbus 320 aircraft were
returned to the lessors, one Boeing 747-400 aircraft was sold and one Boeing
737-200 aircraft was donated to the Museum of Alberta. In addition, 15
Bombardier CRJ100 aircraft were transferred to Jazz and one Boeing 767-200
aircraft was removed from the fleet. The average age of Air Canada's operating
fleet was 9.5 years at December 31, 2005. Air Canada's operating fleet,
excluding Jazz aircraft, at December 31, 2005, was as described below:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                      Number of                                             Consolidated
                                      operating       Average                   Capital         under       Operating
                        Total seats  aircraft (1)        Age       Owned (2)   Lease (2)     AcG-15 (2)       Lease
                        ----------------------------------------------------------------------------------------------
<S>                             <C>           <C>        <C>          <C>
Widebody Aircraft
Airbus A340-500                 267           2          1.5            2          -               -            -
Airbus A340-300             285-286          10          7.7            -          8               -            2
Airbus A330-300                 274           8          5.2            -          8               -            -
Boeing 767-300              203-222          33         12.5            1          2               6           24
Boeing 767-200                  207          12         19.4           12          -               -            -
Narrowbody Aircraft
Airbus A321                     166          10          3.8            -          -               5            5
Airbus A320                     140          51         12.8            -          -               -           51
Airbus A319                     120          48          7.0            -         17              17           14
Embraer 190                      93           3          0.0            3          -               -            -
Embraer 175                      73          14          0.3           14          -               -            -
CRJ100                           50          10         10.6            -          -              10            -
                                     --------------------------------------------------------------------------------
Total Operating Aircraft                    201          9.5           32         35              38           96
---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)      Excludes aircraft which have been permanently removed from service.
(2)      Owned aircraft as well as capital leases and leases consolidated under
         AcG-15 are carried on the Consolidated Statement of Financial
         Position.

         The following table reflects the impact on Air Canada's fleet of the
future committed aircraft deliveries and projected aircraft removals resulting
from the new deliveries. The aircraft options, cancelable orders and purchase
rights are not included in this table.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                                                  Future
                                    Number of operating      committed aircraft   Estimated future     Resulting number
                                        aircraft at           deliveries at       projected aircraft      of operating
                                     December 31, 2005      December 31, 2005          removals             aircraft
                                   ---------------------------------------------------------------------------------------
<S>                                              <C>                    <C>                 <C>                  <C>
Widebody Aircraft
Boeing 777 - 300ER/200LR/200F                      -                    18                     -                  18
Boeing 787 - 900/800                               -                    14                     -                  14
Boeing 767-300                                    33                                           -                  33
Boeing 767-200                                    12                                        (12)                   -
Airbus A340-500                                    2                                         (2)                   -
Airbus A340-300                                   10                                        (10)                   -
Airbus A330-300                                    8                                         (8)                   -
Narrowbody Aircraft
Airbus A321                                       10                     -                   (3)                   7
Airbus A320                                       51                     -                  (10)                  41
Airbus A319                                       48                     -                   (3)                  45
Embraer 190                                        3                    42                     -                  45
Embraer 175                                       14                     1                     -                  15
CRJ100 (1)                                        10                     -                  (10)                   -
                                   ---------------------------------------------------------------------------------------
Total Operating Aircraft                         201                    75                  (58)                 218
--------------------------------------------------------------------------------------------------------------------------
(1) The 10 CRJ100s will be transferred to Jazz.
</TABLE>


-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 52
2005 Management's Discussion and Analysis
<PAGE>


         In conjunction with the deliveries of the Boeing 777 and 787 aircraft,
the Corporation expects to remove 20 widebody Airbus aircraft (two A340-500s,
ten A340-300s and eight A330-300s) from its fleet as well as 12 Boeing 767-200
aircraft. Two of the Airbus A340-300 aircraft are held under operating leases
with lease terminations in 2009.

Jazz

         During 2005, Jazz took delivery of 15 Bombardier CRJ705 aircraft and
13 Bombardier CRJ200 aircraft, nine of which were entered into service at
December 31, 2005 and four of which were received in 2005 but not entered into
service at December 31, 2005 and are not shown as operating aircraft. In
addition, 15 Bombardier CRJ100 aircraft were transferred from Air Canada to
Jazz. Also during 2005, eight BAe 146 aircraft and four Dash 8-100 aircraft
were returned to lessors and 27 Fokker F28 aircraft were sold. The average age
of Jazz's operating fleet was 11.2 years at December 31, 2005.

         Jazz's operating fleet at December 31, 2005 was as described below:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                                       Average
                                        Number of      Age of                                Consolidated
                                        operating     Operating                     Capital      under       Operating
                          Total seats  aircraft (1)   Aircraft          Owned        Lease       AcG-15         Lease
                          -----------------------------------------------------------------------------------------------

<S>                              <C>           <C>         <C>           <C>            <C>          <C>           <C>
Bombardier  CRJ705               75            15          0.5             -            -             -            15
Bombardier  CRJ200               50            27          3.9             -            -             -            27
Bombardier  CRJ100               50            15          9.9             -            -            13             2
Dash-8-300                       50            26         15.8            17            -             -             9
Dash-8-100                       37            38         18.0            38            -             -             -
                          -----------------------------------------------------------------------------------------------

Total Operating Aircraft                      121         11.2            55            -            13            53

-------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Excludes aircraft which have been permanently removed from service.

         Jazz has a planned operating fleet of 135 aircraft in July 2006. The
increase is due to the addition of ten CRJ100 aircraft transferred from Air
Canada and six CRJ200 aircraft as well as the removal of two Dash-8-100
aircraft.


-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 53
2005 Management's Discussion and Analysis
<PAGE>


9.  PEOPLE

         In 2004, the Corporation concluded long-term collective agreements
with all union groups which expire in 2009. These collective agreements provide
for a process to revise wage levels in 2006 by negotiation or, failing
negotiation, by mediation or arbitration without resort to strike or lock out.

         In the fourth quarter of 2005, the Corporation had an average of
33,090 FTE employees compared to an average of 31,991 FTE employees in the
fourth quarter of 2004. This reflects a 3 per cent increase from the fourth
quarter of 2004, as shown in the table below:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                                             Fourth Quarter    Fourth Quarter                        %
                                         Union                      2005              2004            Change       Change
<S>                                      <C>                        <C>               <C>               <C>           <C>
Transportation Services
Management & Administrative Support      -                          3,565             3,523              42           1
Pilots                                   ACPA                       2,541             2,563            (22)         (1)
Flight Attendants                        CUPE                       6,010             5,837             173           3
Customer sales & Service Agents          CAW / IBT                  3,927             3,942            (15)         (0)
Technical Services, Ramp & Cargo         IAMAW                      6,924             6,775             149           2
UK Unionized employees                   AMICUS / TGWU                682               749            (67)         (9)
Other unionized                                                       528               494              34           7
                                                             ------------------------------------------------
Transportation Services total (1)                                  24,177            23,883             294           1

Aeroplan                                                            1,057             1,185           (128)        (11)

ACTS                                                                4,055             3,560             495          14

Jazz                                                                3,801             3,363             438          13


                                                             ------------------------------------------------
ACE                                                                33,090            31,991           1,099           3
                                                             ------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------

Note: Certain prior year's information was reclassified to conform to the current year's presentation.
</TABLE>

(1) Transportation Services includes the following FTEs: Air Canada 15,414; Air
Canada Cargo 1,223; ACGHS 7,038; Air Canada Vacations 441; Other 61.



-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 54
2005 Management's Discussion and Analysis
<PAGE>


         The graphs below reflect the significant reduction in average
quarterly FTE employee levels from 2001 to 2005 as well as the increase in
productivity as measured by operating revenue per FTE employee and ASM per FTE
employee:



                        Average Number of FTE Employees
                   [tabular presentation of graphic display]

-------------------------------------------------------------------------
         Period                 Average Number of FTE Employees
-------------------------------------------------------------------------
       Q1 - 2001                             44,841
-------------------------------------------------------------------------
       Q2 - 2001                             43,425
-------------------------------------------------------------------------
       Q3 - 2001                             42,614
-------------------------------------------------------------------------
       Q4 - 2001                             39,480
-------------------------------------------------------------------------
       Q1 - 2002                             38,440
-------------------------------------------------------------------------
       Q2 - 2002                             39,941
-------------------------------------------------------------------------
       Q3 - 2002                             40,006
-------------------------------------------------------------------------
       Q4 - 2002                             39,996
-------------------------------------------------------------------------
       Q1 - 2003                             39,319
-------------------------------------------------------------------------
       Q2 - 2003                             36,798
-------------------------------------------------------------------------
       Q3 - 2003                             33,680
-------------------------------------------------------------------------
       Q4 - 2003                             33,124
-------------------------------------------------------------------------
       Q1 - 2004                             32,986
-------------------------------------------------------------------------
       Q2 - 2004                             32,832
-------------------------------------------------------------------------
       Q3 - 2004                             32,280
-------------------------------------------------------------------------
       Q4 - 2004                             31,991
-------------------------------------------------------------------------
       Q1 - 2005                             31,623
-------------------------------------------------------------------------
       Q2 - 2005                             32,364
-------------------------------------------------------------------------
       Q3 - 2005                             32,850
-------------------------------------------------------------------------
       Q4 - 2005                             33,090
-------------------------------------------------------------------------


                       Operating Revenue per FTE Employee
                                 ($ thousands)
                   [tabular presentation of graphic display]

-----------------------------------------------------------------------------
         Period                Operating Revenue per FTE Employee
                                          ($ thousands)
-----------------------------------------------------------------------------
       Q1 - 2001                              52.3
-----------------------------------------------------------------------------
       Q2 - 2001                              59.0
-----------------------------------------------------------------------------
       Q3 - 2001                              60.7
-----------------------------------------------------------------------------
       Q4 - 2001                              53.6
-----------------------------------------------------------------------------
       Q1 - 2002                              59.5
-----------------------------------------------------------------------------
       Q2 - 2002                              63.9
-----------------------------------------------------------------------------
       Q3 - 2002                              68.6
-----------------------------------------------------------------------------
       Q4 - 2002                              56.1
-----------------------------------------------------------------------------
       Q1 - 2003                              56.3
-----------------------------------------------------------------------------
       Q2 - 2003                              53.1
-----------------------------------------------------------------------------
       Q3 - 2003                              66.2
-----------------------------------------------------------------------------
       Q4 - 2003                              59.7
-----------------------------------------------------------------------------
       Q1 - 2004                              64.3
-----------------------------------------------------------------------------
       Q2 - 2004                              67.6
-----------------------------------------------------------------------------
       Q3 - 2004                              77.3
-----------------------------------------------------------------------------
       Q4 - 2004                              64.5
-----------------------------------------------------------------------------
       Q1 - 2005                              68.8
-----------------------------------------------------------------------------
       Q2 - 2005                              75.9
-----------------------------------------------------------------------------
       Q3 - 2005                              86.2
-----------------------------------------------------------------------------
       Q4 - 2005                              71.5
-----------------------------------------------------------------------------


                              ASM per FTE Employee
                                  (thousands)
                   [tabular presentation of graphic display]

-------------------------------------------------------------------------
         Period                       ASM per FTE Employee
                                          (thousands)
-------------------------------------------------------------------------
       Q1 - 2001                              326
-------------------------------------------------------------------------
       Q2 - 2001                              357
-------------------------------------------------------------------------
       Q3 - 2001                              402
-------------------------------------------------------------------------
       Q4 - 2001                              340
-------------------------------------------------------------------------
       Q1 - 2002                              355
-------------------------------------------------------------------------
       Q2 - 2002                              385
-------------------------------------------------------------------------
       Q3 - 2002                              433
-------------------------------------------------------------------------
       Q4 - 2002                              347
-------------------------------------------------------------------------
       Q1 - 2003                              339
-------------------------------------------------------------------------
       Q2 - 2003                              342
-------------------------------------------------------------------------
       Q3 - 2003                              450
-------------------------------------------------------------------------
       Q4 - 2003                              396
-------------------------------------------------------------------------
       Q1 - 2004                              418
-------------------------------------------------------------------------
       Q2 - 2004                              424
-------------------------------------------------------------------------
       Q3 - 2004                              495
-------------------------------------------------------------------------
       Q4 - 2004                              401
-------------------------------------------------------------------------
       Q1 - 2005                              429
-------------------------------------------------------------------------
       Q2 - 2005                              448
-------------------------------------------------------------------------
       Q3 - 2005                              516
-------------------------------------------------------------------------
       Q4 - 2005                              417
-------------------------------------------------------------------------



-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 55
2005 Management's Discussion and Analysis
<PAGE>


10. QUARTERLY FINANCIAL DATA

         The table below describes quarterly financial results and major
operating statistics of Air Canada for the first three quarters of 2004 and the
financial results of ACE for the fourth quarter of 2004 and the full year 2005:

<TABLE>
<CAPTION>

                   Quarterly Financial Results and Major Operating Statistics - Condensed Consolidated
                   -----------------------------------------------------------------------------------
------------------------------------------ --------------------------------- ----------------------------------------------------
$ millions                                       Predecessor Company
(except per share figures)                            Air Canada                                       ACE
                                           --------------------------------- ----------------------------------------------------
                                                               2004                                         2005
------------------------------------------ ------------------------------------------- ------------------------------------------
                                              Q1          Q2         Q3       Q4         Q1         Q2          Q3         Q4
------------------------------------------ --------- ---------- ---------- --------- ---------- ---------- ----------- ----------

<S>                                          <C>        <C>        <C>       <C>        <C>        <C>         <C>        <C>
Passenger revenues                           1,661      1,844      2,123     1,681      1,739      2,100       2,461      1,969
Cargo revenues                                 126        137        142       151        135        147         162        176
Other revenues                                 334        240        231       230        303        211         210        217
                                           --------- ---------- ---------- --------- ---------- ---------- ----------- ----------
Operating revenues                           2,121      2,221      2,496     2,062      2,177      2,458       2,833      2,362

Operating expenses                           2,266      2,199      2,253     2,065      2,187      2,281       2,513      2,397
                                           --------- ---------- ---------- --------- ---------- ---------- ----------- ----------

Operating income (loss) before
reorganization and restructuring items        (145)        22        243       (3)        (10)       177         320        (35)

Reorganization and  restructuring items       (132)      (426)      (313)        -          -         -            -          -

Non-operating income (expense)                 (43)       (72)      (131)      (47)       (63)       104         (38)       (88)
                                           --------- ---------- ---------- --------- ---------- ---------- ----------- ----------


Income (loss) before the following items:     (320)      (476)      (203)      (50)       (73)       281         282       (123)

Non-controlling interest                         -          -          -         -         (3)        (4)        (9)         (8)

Foreign exchange gain (loss) on
non-compromised monetary items                  17        (34)       121        78        (15)       (53)        125        (11)

Recovery of (provision for) income taxes        (1)         -         (1)      (13)        14        (56)       (128)        39
                                           --------- ---------- ---------- --------- ---------- ---------- ----------- ----------

Net income (loss)                             (304)      (510)       (81)       15        (77)       168         270       (103)
                                           ========= ========== ========== ========= ========== ========== =========== ==========

Earnings (loss)  (1)
   Per share - basic                         (2.53)     (4.24)     (0.67)     0.17      (0.87)      1.67        2.66      (1.02)
   Per share - diluted                       (2.53)     (4.24)     (0.67)     0.17      (0.87)      1.49        2.33      (1.02)

Revenue passenger miles (millions)          10,057     10,836     12,853     9,681     10,586     11,613      13,981     10,584

Available seat miles (millions)             13,797     13,931     15,993    12,815     13,566     14,487      16,961     13,808

Passenger load factor (%)                     72.9       77.8       80.4      75.5       78.0       80.2        82.4       76.7

Operating expense per
  available seat mile (CASM)  (cents)         16.4       15.8       14.1      16.1       16.1       15.7        14.8       17.4
Operating expense per available seat
mile excl. fuel expense (cents)               14.0       13.1       11.2      12.7       13.1       12.1        10.8       13.2

------------------------------------------ --------- ---------- ---------- --------- ---------- ---------- ----------- ----------
</TABLE>

(1) Pursuant to the Plan as further described in Note 19 to the 2005 Annual
Consolidated Financial Statements, all issued and outstanding options of Air
Canada and warrants were cancelled without payment or consideration on
September 30, 2004. In addition, a new ACE share capital structure was
established, as further described in Note 12 to the 2005 Annual Consolidated
Financial Statements.


-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 56
2005 Management's Discussion and Analysis
<PAGE>


11.  SEGMENT INFORMATION

         The segment reporting structure for the Corporation reflects four
reportable segments: Transportation Services, Aeroplan, Jazz and ACTS. In the
Predecessor Company, there was only one reportable segment.

         This segment reporting was applied on a prospective basis. Prior
period segment information is presented for comparative purposes for Aeroplan
and Jazz, however, for the reasons described below, segment reporting
information pertaining to periods prior to September 30, 2004 is not directly
comparable.

        Segment financial information has been prepared consistent with how
financial information is produced internally for the purposes of making
operating decisions. Segments negotiate transactions with each other as if they
were unrelated parties.

         In the Predecessor Company, ACTS was a cost centre within Air Canada
and discrete financial information is not available. In addition, a capacity
purchase agreement between Air Canada and Jazz came into effect on September
30, 2004. Jazz segment information, for periods prior to September 30, 2004, is
not comparable as a result of this new agreement.

         As described on page 8 of this MD&A, the Corporation changed the
accounting policy effective September 30, 2004 for the recognition of its
revenues relating to the loyalty program. As a result, Aeroplan segment results
for periods prior to September 30, 2004 are not directly comparable.




-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 57
2005 Management's Discussion and Analysis
<PAGE>


Fourth Quarter Segment Results

         The tables below provide total amounts reported by each segment in the
consolidated financial statements for the fourth quarter of 2005 and in the
consolidated financial statements for the fourth quarter of 2004.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                                        Three Months ended December 31, 2005
                              -----------------------------------------------------------------------------------------
($ millions)                   Transportation                                              Inter-Segment      ACE
                                  Services        Aeroplan        Jazz          ACTS       Elimination   Consolidated
-----------------------------------------------------------------------------------------------------------------------
<S>                                      <C>             <C>           <C>            <C>         <C>            <C>
Passenger revenue                        1,969             -             -              -             -        1,969
Cargo revenue                              176             -             -              -             -          176
Other revenue                               25           150             3             39             -          217
                              -----------------------------------------------------------------------------------------
External revenue                         2,170           150             3             39             -        2,362
Inter-segment revenue                       37             4           301            153          (495)           -
                              -----------------------------------------------------------------------------------------
Total revenue                            2,207           154           304            192          (495)       2,362
                              -----------------------------------------------------------------------------------------

Aircraft rent                               90             -            28              -            (1)         117
Amortization of capital
assets                                     110             3             4              8             -          125
Other operating expenses                 2,098           121           238            192          (494)       2,155
                              -----------------------------------------------------------------------------------------
Total operating expenses                 2,298           124           270            200          (496)       2,397

Operating income (loss)                    (91)           30            34             (8)            -          (35)
Total non-operating income
(expense), non-controlling
interest, foreign exchange
and income taxes                           (62)            -            (2)            (4)            -          (68)

                              -----------------------------------------------------------------------------------------
Segment Results                           (153)           30            32            (12)            -         (103)
                              -----------------------------------------------------------------------------------------

Operating Margin %                        (4.1)         19.5          11.2           (4.2)                      (1.5)
EBITDAR(1)                                 109            33            66              0            (1)         207
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                                        Three months ended December 31, 2004
                              -----------------------------------------------------------------------------------------
($ millions)                   Transportation                                             Inter-Segment       ACE
                                  Services        Aeroplan        Jazz          ACTS       Elimination    Consolidated
-----------------------------------------------------------------------------------------------------------------------
<S>                                      <C>             <C>           <C>            <C>         <C>            <C>
Passenger revenue                        1,681             -             -              -            -         1,681
Cargo revenue                              151             -             -              -            -           151
Other revenue                               44           121             3             62            -           230
                              -----------------------------------------------------------------------------------------
External revenue                         1,876           121             3             62            -         2,062
Inter-segment revenue                       54             6           185            106         (351)            -
                              -----------------------------------------------------------------------------------------
Total revenue                            1,930           127           188            168         (351)        2,062
                              -----------------------------------------------------------------------------------------

Aircraft rent                              103             -             9              -           (1)          111
Amortization of capital
assets                                      73             1             4              7            -            85
Other operating expenses                 1,812           104           153            150         (350)        1,869
                              -----------------------------------------------------------------------------------------
Total operating expenses                 1,988           105           166            157         (351)        2,065

Operating income (loss)                    (58)           22            22             11            -            (3)
Total non-operating income
(expense), foreign exchange
and income taxes                            26             -            (4)            (4)           -            18

                              -----------------------------------------------------------------------------------------
Segment Results                            (32)           22            18              7            -            15
                              -----------------------------------------------------------------------------------------

Operating Margin %                        (3.0)         17.3          11.7            6.5                        (0.1)
EBITDAR(1)                                 118            23            35             18           (1)           193
-----------------------------------------------------------------------------------------------------------------------
(1) Refer to "Non-GAAP Financial Measures" on page 6 of this MD&A for additional information on EBITDAR.
</TABLE>



-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 58
2005 Management's Discussion and Analysis
<PAGE>

2005 Segment Results

         Total amounts reported by each segment in the consolidated financial
statements for the full year 2005 are as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                                       Twelve Months ended December 31, 2005
                              -----------------------------------------------------------------------------------------
($ millions)                                                                                  Inter-
                                Transportation                                                Segment           ACE
                                   Services        Aeroplan        Jazz          ACTS       Elimination    Consolidated
-----------------------------------------------------------------------------------------------------------------------
<S>                                      <C>             <C>         <C>              <C>       <C>              <C>
Passenger revenue                        8,269             -             -              -            -          8,269
Cargo revenue                              620             -             -              -            -            620
Other revenue                              117           627            10            187            -            941
                              -----------------------------------------------------------------------------------------
External revenue                         9,006           627            10            187            -          9,830
Inter-segment revenue                      194            13         1,013            567       (1,787)             -
                              -----------------------------------------------------------------------------------------
Total revenue                            9,200           640         1,023            754       (1,787)          9,830
                              -----------------------------------------------------------------------------------------

Aircraft rent                              343             -            80              -           (6)            417
Amortization of capital
assets                                     424             8            18             32            -             482
Other operating expenses                 8,259           530           796            675       (1,781)          8,479
                              -----------------------------------------------------------------------------------------
Total operating expenses                 9,026           538           894            707       (1,787)          9,378

Operating income                           174           102           129             47            -             452

Total non-operating income
(expense), non-controlling
interest, foreign exchange
and income taxes                          (167)           (2)          (11)           (14)           -            (194)

                              -----------------------------------------------------------------------------------------
Segment Results                              7           100           118             33            -             258
                              -----------------------------------------------------------------------------------------

Total assets                            11,001           674           504            381         (713)         11,847
Additions to capital assets                849            12            16              5            -             882

Operating Margin %                         1.9          15.9          12.6            6.2            -             4.6
EBITDAR(1)                                 941           110           227             79           (6)          1,351
-----------------------------------------------------------------------------------------------------------------------
(1) Refer to "Non-GAAP Financial Measures" on page 6 of this MD&A for additional information on EBITDAR.
</TABLE>

         Subsequent to the dilution of ACE's interest in Aeroplan, a
non-controlling interest charge is recorded upon the consolidation of Aeroplan.
As Aeroplan's non-controlling interest capital is in a deficit position, the
non-controlling interest charge is equal to the greater of the non-controlling
interest holders' share of the Aeroplan earnings for the period or the amount
of distributions to the non-controlling interest holder during the period.

         Refer to Note 15 to the 2005 Annual Consolidated Financial Statements
for additional information on segment results.


-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 59
2005 Management's Discussion and Analysis
<PAGE>

11.1.  Analysis of Results - Fourth Quarter 2005 versus Fourth Quarter 2004

Transportation Services

         For the fourth quarter of 2005, the Transportation Services segment
reported an operating loss of $91 million, a deterioration of $33 million
compared to the operating loss of $58 million recorded in the same quarter of
2004.

         EBITDAR for Transportation Services amounted to $109 million, a
decrease of $9 million from the fourth quarter of 2004, despite a $146 million
rise in the cost of fuel. A factor in the deterioration of EBITDAR, other than
fuel expense, was in the weaker results of Air Canada Vacations largely due to
the impact of the hurricane season. Refer to page 7 of this MD&A for a
reconciliation of EBITDAR by segment.

         Passenger revenues increased $288 million or 17 per cent on a capacity
increase of 8 per cent reflecting both yield improvements and traffic growth.
The system yield improvement was primarily due to increased fare levels in the
domestic and US transborder markets to partially offset higher fuel costs. An
improved domestic competitive position and a stronger market demand for the
higher-priced Tango Plus product were also factors in the domestic yield
improvement. Additionally, US transborder yield also improved as a result of a
redesign of conditions underlying fares aimed at the business-oriented market
which occurred in the fourth quarter of 2005. International yields rose just
under 1 per cent as higher fuel surcharges were mostly offset by weaker foreign
currencies and competitive pricing. Higher unit revenues (passenger revenue per
ASM), due mostly to increased North America fare levels but also to a 1.2
percentage point rise in passenger load factor, offset the growth in unit cost
resulting primarily from the sharply higher fuel prices.

         Operating expenses increased $310 million or 16 per cent over the
fourth quarter of 2004 and included a $146 million or 34 per cent increase in
fuel expense as well as an increase in inter-segment fees (which are eliminated
on consolidation) charged by Jazz under the CPA of approximately $70 million
mainly reflecting an increase in Jazz's block hours, capacity and fleet size.
Under Air Canada's CPA with Jazz, Jazz is paid fees based on a variety of
different operational metrics in addition to aircraft ownership costs. Jazz is
also reimbursed for certain pass-through costs which are further detailed in
the discussion on the Jazz segment. Other increases included depreciation,
amortization and obsolescence, airport and navigation fees, aircraft
maintenance, materials and supplies expense and salaries, wages and benefits.
Decreases in operating expenses over the 2004 quarter included commissions,
aircraft rent, advertising and promotion expenses and various other reductions.

Aeroplan

         Operating revenues amounted to $154 million in the fourth quarter of
2005, up $27 million from the fourth quarter of 2004, primarily due to an
increase in revenues recognized from the sale of redemption of Aeroplan Miles
(including breakage). The increase in revenues recognized was mainly
attributable to an increase in the number of Aeroplan Miles redeemed combined
with increased capacity available from Air Canada related to Avenue rewards,
which were introduced in late April 2004, as well as the continued expansion of
non-air rewards.


-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 60
2005 Management's Discussion and Analysis
<PAGE>

         Operating expenses amounted to $124 million in the fourth quarter of
2005, an increase of $19 million from the fourth quarter of 2004, mainly due to
a higher cost of rewards primarily attributable to a greater number of Aeroplan
Miles redeemed.

         Operating income amounted to $30 million in the fourth quarter of 2005
compared to $22 million in the fourth quarter of 2004, an increase of $8
million or 36 per cent.

Jazz
         Under the initial CPA, effective for the period October 1, 2004 to
December 31, 2005, and the new CPA, which became effective January 1, 2006,
Jazz is paid fees based on a variety of different metrics, including block
hours flown, cycles (number of take-offs and landings) and passengers in
addition to certain variable and fixed aircraft ownership rates. In addition,
Jazz is entitled to repayment of certain pass-through costs, including fuel,
navigation, landing and terminal fees and certain other costs. Jazz is also
eligible to receive payments for successfully achieving certain performance
incentives on a quarterly basis related to on-time performance, controllable
flight completion, baggage handling performance and overall customer
satisfaction.

         For the fourth quarter of 2005, Jazz reported an operating income of
$34 million, an improvement of $12 million compared to the operating income of
$22 million recorded in the same quarter of 2004. EBITDAR was $66 million in
the fourth quarter of 2005 compared to EBITDAR of $35 million in the fourth
quarter of 2004, an increase of $31 million or 89 per cent which is the result
of fleet additions, increased hours of contract flying, cost control and
performance incentives earned in the latest quarter. Refer to page 7 of this
MD&A for a reconciliation of EBITDAR by segment.

         Operating revenue was up $116 million or 62 per cent. The increase in
revenues was due to a net increase of 30 aircraft operated by Jazz, an increase
in block hours flown by these aircraft of 33 per cent, and an increase in the
pass-through costs charged to Air Canada under the CPA of $52 million.

         Operating expenses rose $104 million or 63 per cent compared to the
fourth quarter of 2004, including an increase in fuel expense of $33 million or
114 per cent. Fuel expense is a pass-through cost charged to Air Canada under
the CPA. Capacity, as measured by available seat miles (ASM) increased by 82
per cent. Unit cost for the fourth quarter of 2005 decreased by 10 per cent
from fourth quarter of 2004. Excluding fuel expense, unit cost was down 16
percent compared to the 2004 fourth quarter. Unit cost reductions were achieved
in all expense categories except fuel expense, aircraft rent and terminal
handling services. Unit aircraft rental costs increased quarter-over-quarter
reflecting the new aircraft deliveries throughout 2005.

         In the fourth quarter of 2005, non-operating expense amounted to $2
million, essentially unchanged from the fourth quarter of 2004. Gain on the
disposal of property and equipment in the fourth quarter of 2005 was $1
million.


-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 61
2005 Management's Discussion and Analysis
<PAGE>

         Net income for the fourth quarter of 2005 was $32 million compared to
net income of $18 million recorded in the fourth quarter of 2004, an
improvement of $14 million. The increase in net income was due to an increased
fleet and effective cost control.

ACTS

         During 2005, ACTS continued its focus on increasing its customer base
and developing into a stand-alone MRO. In the fourth quarter of 2005,
significant effort and focus went into the review and planned improvement of
operational processes and systems.

         Additionally, ACTS completed a review of all existing accounting
policies and practices and in many cases, implemented new practices consistent
with those of a stand-alone MRO. This activity is expected to continue into the
first quarter of 2006.

         During the fourth quarter of 2005, ACTS changed its accounting policy,
mainly related to engine maintenance services provided to Air Canada, from
proportional performance to the completed contract method. This change in
accounting policy was applied from October 1, 2004. The change in accounting
policy had the effect of decreasing the reported segment results for the fourth
quarter of 2004 by $11 million. The impact of this change was to defer costs
and adjust revenues in relation to work in process at the end of each quarter.
Additionally, in the fourth quarter of 2005, ACTS recorded other adjustments of
$7 million including the results of a complete physical inventory count.

         Inter-segment revenue for the fourth quarter of 2005 increased by $47
million or 44 per cent compared to the fourth quarter of 2004, mostly due to
increased activity in engine and component maintenance for Air Canada. In
addition, revenues for the fourth quarter of 2004 were negatively impacted by
the change of accounting policy to the completed contract method which meant
that the number of completed events during this first quarter of operation was
significantly lower than the ongoing trend. Other revenue for the quarter
decreased by $23 million mostly due to a reduction in third party revenue for
engine maintenance due to increased competitive market conditions.

         ACTS reported a net loss of $12 million for the fourth quarter of 2005
compared to net income of $7 million in the fourth quarter of 2004. The
unfavorable variance to last year is mainly due to the reduced profitability of
the airframe maintenance division. This reduced profitability is attributable
primarily to greater than expected operational challenges relating to
significant production capacity growth initiatives at ACTS' Montreal and
Vancouver maintenance centers, which required the integration of additional
staff and new customer processes.


-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 62
2005 Management's Discussion and Analysis
<PAGE>

12.  OFF-BALANCE SHEET ARRANGEMENTS

Guarantees

         As a result of the adoption of AcG-15 on January 1, 2005, the
Corporation no longer has any residual value guarantees under any of its
aircraft leasing agreements accounted for as operating leases. The entire debt
balance under these leasing agreements is on the Consolidated Statement of
Financial Position of the Corporation and, as a result, the residual value
support previously applicable under these leasing agreements is no longer
characterized as a guarantee of the Corporation, on an accounting basis.

Retained or Contingent Interest in Assets Transferred

         ACE has no material arrangements involving the transfer of assets to
an unconsolidated entity where those assets serve as credit, liquidity or
market risk support to that entity.

Derivative Instruments

         Under its risk management policy, the Corporation manages its exposure
to changes in interest rates, foreign exchange rates and jet fuel prices
through the use of various derivative financial instruments. The Corporation
uses derivative financial instruments only for risk management purposes, not
for generating trading profit. ACE's risk management policies and use of
derivative financial instruments are further described in Note 17 to ACE's 2005
Annual Consolidated Financial Statements. The Corporation has entered into
certain derivative financial instrument agreements to manage interest rate and
currency risk in certain aircraft lease agreements.

Interest Rate Contracts

         During 2005, the Corporation reached a settlement with a third party
related to interest rate swaps covering two Boeing 767 aircraft leases which
were terminated as a result of Air Canada's filing for CCAA on April 1, 2003. A
dispute arose following termination between Air Canada and the unrelated third
party with respect to replacement arrangements for the swaps. The settlement
agreement provided for a payment to Air Canada of US$8 million related to a
portion of the net payments the Corporation would have received had the swaps
not been terminated. The replacement swaps that were put in place with another
unrelated third party have a fair value of $9 million in favour of the
Corporation on inception. As a result of these transactions, the Corporation
recorded a gain of $17 million, net of transaction fees of $3 million, in the
third quarter of 2005. The swaps have a term to January 2024 and convert lease
payments related to two Boeing 767 aircraft leases consolidated under AcG-15,
from fixed to floating rates. These swaps have not been designated as hedges
for accounting purposes. At December 31, 2005, these two swaps have a fair
value of $7 million in favour of the Corporation.

Foreign Exchange Contracts

         At December 31, 2005, the Company has entered into foreign currency
forward contracts and option agreements on US$521 million of future purchases.
The fair value of these foreign currency contracts at December 31, 2005 is $1
million in favour of third parties. These derivative instruments have not been
designated as hedges for accounting purposes. The unrealized loss has been
recorded in foreign exchange gain (loss). The Corporation had no foreign
exchange forward contracts outstanding at December 31, 2004.


-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 63
2005 Management's Discussion and Analysis
<PAGE>

         The Corporation has entered into currency swap agreements for 16
Bombardier Regional Jet operating leases until lease terminations between 2007
and 2011. Currency swaps for five Canadian Regional Jet operating leases, with
unrelated creditworthy third parties, were put in place on the inception of the
leases and have a fair value at December 31, 2005 of $13 million in favour of
third parties (2004 - $12 million in favour of unrelated creditworthy third
parties), taking into account foreign exchange rates in effect at that time.
Currency swaps for 11 Bombardier Regional Jet operating leases have a fair
value at December 31, 2005 of $3 million in favour of the Corporation. These
swaps have not been designated as hedges for hedge accounting purposes. The
unrealized changes in fair value have been recorded in foreign exchange gain
(loss).

Fuel Contracts

         In order to minimize the Corporation's exposure to the volatility of
fuel prices, a systematic fuel risk management strategy has been implemented
using financial instruments to build up the Corporation's hedge position in
increments of approximately 4 per cent per month to a target level of
approximately 50 per cent of its anticipated jet fuel requirements, beginning
in September 2005 for a 24-month period.

         At December 31, 2005, the Corporation had collar option structures in
place to hedge a portion of its anticipated jet fuel requirements over the 2006
to 2007 period. For all heating and crude oil fuel hedges, the prices disclosed
below do not include the jet fuel premium.

2005 Fuel Hedges
----------------
         For 2005, the Corporation had hedged approximately 3 per cent of its
2005 jet fuel requirements through jet fuel-based contracts at prices that
fluctuated between an average of US$75.00 to US$92.00 per barrel. All of the
Corporation's fourth quarter 2005 hedges were also effectively jet fuel-based
contracts. The Corporation had hedged 12 per cent of its fourth quarter 2005
jet fuel requirements at prices that fluctuated between an average of US$75.00
to US$92.00 per barrel.

2006 Fuel Hedges
----------------
         For 2006, the majority of the Corporation's hedge positions are
effectively in the form of jet fuel and heating oil-based contracts. The
Corporation has hedged 21 per cent of its 2006 requirements at prices that can
fluctuate between an average of US$75.00 to US$87.00 per barrel for the jet
fuel contracts and an average of US$74.00 to $86.00 per barrel for the
heating-oil based contracts.

2007 Fuel Hedges
----------------
         For 2007, the majority of the hedge positions are heating oil and
crude oil-based contracts. The Corporation has hedged 13 per cent of its 2007
requirements at prices that can fluctuate between an average of US$74.00 to
US$86.00 per barrel for the heating oil-based contracts and an average of
US$56.00 to US$68.00 per barrel for the crude oil-based contracts.


-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 64
2005 Management's Discussion and Analysis
<PAGE>




         Contracts entered into before October 1, 2005 did not qualify for
hedge accounting whereas contracts entered into after October 1, 2005 do
qualify for hedge accounting. Under hedge accounting, gains or losses on fuel
hedging contracts are recognized in earnings as a component of aircraft fuel
expense when the underlying jet fuel being hedged is consumed. Prior to these
derivative instruments being designated as hedges for accounting purposes, an
unrealized gain of $2 million was recorded in other non-operating expense.
Subsequent to adopting fuel hedge accounting, the Corporation recognized a net
loss of $3 million as a component of fuel expense on the Consolidated Statement
of Operations. The fair value of the Corporation's fuel hedging agreements at
December 31, 2005 was $3 million in favour of third parties.



-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 65
2005 Management's Discussion and Analysis

<PAGE>


13. CHANGES IN ACCOUNTING POLICIES

Consolidation of Variable Interest Entities

         The Corporation adopted Accounting Guideline 15 - Consolidation of
Variable Interest Entities (AcG-15) effective January 1, 2005. Refer to Note 2
to the 2005 Annual Consolidated Financial Statements for additional information
on the adoption of AcG-15. AcG-15 relates to the application of consolidation
principles to certain entities that are subject to control on a basis other
than ownership of voting interests. The purpose of AcG-15 is to provide
guidance for determining when an enterprise includes the assets, liabilities
and results of activities of such an entity (variable interest entity) in its
consolidated financial statements.

         The adoption of AcG-15 and the consolidation of the variable interest
entities (VIEs) does not alter the underlying contractual arrangements between
Air Canada, as lessee, and its lessors, nor the cash payments from Air Canada
to the lessors. Over the life of the lease, the accounting expense is
consistent between an operating lease and an aircraft leasing entity
consolidated under AcG-15. However, there may be timing differences in any
given period between net expense recorded under an operating lease versus an
aircraft leasing entity consolidated under AcG-15. The main reason for the
difference is due to the fact that lease expense under operating leases is
straight-lined over the term of the lease whereas the interest expense under
the debt obligation in the variable interest entities is based on the effective
interest rate method. The effective interest rate method results in interest
expense being recorded proportionate to the amount of the outstanding debt,
which declines over time. In addition, foreign currency adjustments are
recorded on the outstanding debt obligations of the VIEs; changes in foreign
exchange rates are straight-lined over the term of the lease under operating
lease accounting.

Asset Retirement Obligations

         The Corporation records an asset and related liability for the costs
associated with the retirement of long-lived tangible assets when a legal
liability to retire such assets exists. The fair value of a liability for an
asset retirement obligation is recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset and then amortized over its estimated useful life. In
subsequent periods, the asset retirement obligation is adjusted for the passage
of time and any changes in the amount of the underlying cash flows through
charges to earnings. A gain or loss may be incurred upon settlement of the
liability.



-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 66
2005 Management's Discussion and Analysis
<PAGE>

Future Accounting Standard Changes:

Financial Instruments and Hedges

         The Accounting Standards Board has issued three new standards dealing
with financial instruments: (i) Financial Instruments - Recognition and
Measurement (ii) Hedges and (iii) Comprehensive Income. The key principles
under these standards are that all financial instruments, including
derivatives, are to be included on a company's Statement of Financial Position
and measured, either at their fair values or, in limited circumstances when
fair value may not be considered most relevant, at cost or amortized cost.
Financial instruments intended to be held-to-maturity should be measured at
amortized cost. Existing requirements for hedge accounting are extended to
specify how hedge accounting should be performed. Also, a new location for
recognizing certain unrealized gains and losses - other comprehensive income -
has been introduced. This provides for certain unrealized gains and losses
arising from changes in fair value to be temporarily recorded outside the
Statement of Operations but in a transparent manner. The new standards are
effective for the Corporation beginning January 1, 2007. The standards do not
permit restatement of prior years financial statements, however, the standards
have detailed transition provisions. As the Corporation has financial
instruments, implementation planning will be necessary to review the new
standards to determine the consequences for the Corporation. Accordingly, the
Corporation has not yet evaluated all the consequences of the new standards;
however, the adoption of the standards may have a material impact on the
Corporation's Statement of Financial Position.


-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 67
2005 Management's Discussion and Analysis
<PAGE>

14.  CRITICAL ACCOUNTING ESTIMATES

         Critical accounting estimates are those that are most important to the
portrayal of the Corporation's financial condition and results of operations.
They require management's most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters
that are inherently uncertain. Actual results could differ from those estimates
under different assumptions or conditions.

         The Corporation has identified the following areas that contain
critical accounting estimates utilized in the preparation of its financial
statements:

Air Transportation Revenues

         Airline passenger advance sales are deferred and included in current
liabilities. Passenger revenues are recognized when the transportation is
provided, except for revenues on unlimited flight passes which are recognized
on a straight-line basis over the period during which the travel pass is valid.
Due to the complex pricing structures, the complex nature of interline and
other commercial agreements used throughout the industry, historical experience
over a period of many years, and other factors including refunds, exchanges and
unused tickets, certain amounts are recognized as revenue based on estimates.
The Corporation performs regular evaluations on the deferred revenue liability
which may result in adjustments being recognized as revenue. Events and
circumstances may result in actual results that are different from estimates,
however, these differences have historically not been material.

Employee Future Benefits

         The significant policies related to employee future benefits,
consistent with CICA 3461 - Employee Future Benefits, are as follows:

         The cost of pensions and other post-retirement benefits earned by
employees is actuarially determined using the projected benefit method prorated
on service, market interest rates, and management's best estimate of expected
plan investment performance, salary escalation, retirement ages of employees
and expected health care costs.

         A market-related value method is used to value plan assets for the
purpose of calculating the expected return on plan assets. Under the selected
method, the differences between investment returns during a given year and the
expected investment returns are amortized on a straight-line basis over four
years.

         Past service costs arising from plan amendments are amortized on a
straight-line basis over the average remaining service period of employees
active at the date of amendment. This period does not exceed the average
remaining service period of such employees up to the full eligibility date.

         Cumulative unrecognized net actuarial gains and losses in excess of 10
per cent of the greater of the projected benefit obligation or market-related
value of plan assets at the beginning of the year are amortized over the
remaining service period of active employees.


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ACE Aviation Holdings Inc.                                              Page 68
2005 Management's Discussion and Analysis
<PAGE>

         Management makes a number of assumptions in the calculation of both
the accrued benefit obligation as well as the pension costs:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
                                                  September 30, 2004   December 31, 2004     December 31, 2005
                                                  ---------------------------------------------------------------
<S>                                                             <C>                   <C>                  <C>
WEIGHTED AVERAGE ASSUMPTIONS USED TO DETERMINE
ACCRUED BENEFIT OBLIGATION
Discount rate as at period end                                  6.00%                 5.75%                5.00%
Rate of compensation increase                                   4.00%                 4.00%                4.00%

WEIGHTED AVERAGE ASSUMPTIONS USED TO DETERMINE
PENSION COSTS
Discount rate as at period end                                  6.00%                 6.00%                5.75%
Expected long term rate of return on plan assets                7.50%                 7.50%                7.50%
Rate of compensation increase                                   4.00%                 4.00%                4.00%
-----------------------------------------------------------------------------------------------------------------
</TABLE>

Discount rate
-------------
         The discount rate used to determine the pension obligation was
determined by reference to market interest rates on corporate bonds rated "AA"
or better with cash flows that approximately match the timing and amount of
expected benefit payments.

Expected Return on Assets Assumption
------------------------------------
         The Corporation's expected long-term rate of return on assets
assumption is selected based on the facts and circumstances that exist as of
the measurement date and the specific portfolio mix of plan assets. Management,
in conjunction with its actuaries, reviews anticipated future long-term
performance of individual asset categories and considers the asset allocation
strategy adopted by the Corporation, including the longer duration in its bond
portfolio in comparison to other pension plans. These factors are used to
determine the average rate of expected return on the funds invested to provide
for the pension plan benefits. While the review considers recent fund
performance and historical returns, the assumption is primarily a long-term,
prospective rate.

Asset Allocation
----------------
         The actual and target allocations of the pension assets are as follows:

--------------------------------------------------------------------------------
                                                                       Target
                       December 31, 2004      November 30, 2005      Allocation
                     -----------------------------------------------------------

Equity                             64.8%                  62.3%           65.0%
Bonds and Mortgages                33.1%                  32.1%           35.0%
Real Estate                         0.2%                   0.1%            0.0%
Short-term and Other                1.9%                   5.5%            0.0%
                     -----------------------------------------------------------
Total                             100.0%                 100.0%          100.0%
--------------------------------------------------------------------------------

Investment Policy
-----------------
         For the Domestic Registered Pension Plans, the investments conform to
the Statement of Investment Policy and Objectives of the Air Canada Pension
Master Trust Fund (Fund). The Audit, Finance and Risk Committee of the Board of
Directors reviews and confirms the policy annually. The investment return
objective of the Fund is to achieve a total annualized rate of return that
exceeds inflation by at least 3.75 per cent over the long term. In addition to
the broad asset allocation, as summarized in the asset allocation section
above, the following policies apply to individual asset classes:


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ACE Aviation Holdings Inc.                                              Page 69
2005 Management's Discussion and Analysis
<PAGE>

         Equity investments can include convertible securities and are required
to be diversified among industries and economic sectors. Foreign equities can
comprise 27 to 33 per cent of the total market value of the trust. Limitations
are placed on the overall allocation to any individual security at both cost
and market value. Derivatives are permitted to the extent they are not used for
speculative purposes or to create leverage.

         Fixed income investments are oriented toward risk averse, long-term,
investment grade securities rated "A" or higher. With the exception of
Government of Canada securities, or a province thereof, in which the plan may
invest the entire fixed income allocation, fixed income investments are
required to be diversified among individual securities and sectors. The target
return is comprised of 50 per cent of the total return of the Scotia Capital
Long Term Bond Index.

Best Estimate of Employer Contributions
---------------------------------------
         Based upon an agreement, subject to approval of the Office of the
Superintendent of Financial Institutions (Canada) (OSFI), between Air Canada
and representatives of the unionized and non-unionized employees and retirees
with respect to the funding of the Domestic Registered Plans, the estimated
2006 contributions are as follows:

<TABLE>
<CAPTION>
 ----------------------------------------------------------------------------------------------------
                                                    2005 Contributions        2006 Contributions
                                                   --------------------------------------------------
                                                                    ($ millions)

<S>                                                                   <C>                        <C>
 Current service cost for Registered Pension Plans                    133                        139
 Past service cost for Registered Pension Plans                        99                        198
 Other pension arrangements                                            52                         52
                                                   --------------------------------------------------
 Total                                                                284                        389
 ----------------------------------------------------------------------------------------------------
</TABLE>

Sensitivity Analysis
--------------------
         Sensitivity analysis on the 2005 pension expense based on different
actuarial assumptions with respect to discount rate and expected return on plan
assets is as follows:

 -------------------------------------------------------------------------------
                                                         0.25 percentage point
                                              ----------------------------------
 Impact on 2005 pension expense                    Decrease           Increase
                                              ---------------------------------
                                                          ($ millions)

 Discount rate on obligation assumption                  10               (10)
 Long-term rate of return on plan assets                 23               (23)
 assumption
 ------------------------------------------------------------------------------

         Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A 10 per cent annual rate of
increase in the per capita cost of covered health care benefits was assumed for
2005 (2004 - 10.75 per cent). The rate is assumed to decrease gradually to 5
per cent by 2013. A one percentage point increase in assumed health care trend
rates would have increased the service and interest costs by $1 million and the
obligation by $15 million. A one percentage point decrease in assumed health
care trend rates would have decreased the service and interest costs by $1
million and the obligation by $20 million.


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ACE Aviation Holdings Inc.                                              Page 70
2005 Management's Discussion and Analysis
<PAGE>


         Upon emergence from CCAA, under fresh start reporting, all unamortized
past service costs, net actuarial losses and net transition obligations, were
written off and the Corporation recorded the estimated net accrued benefit
obligations of the plans as at the date of emergence. At that time, all
assumptions used in the calculations were revalidated.

Loyalty Program

         The Corporation's loyalty program, Aeroplan, awards mileage credits
(Miles) to passengers who fly on Air Canada, Jazz, Star Alliance carriers and
certain other airlines that participate in the program. Additionally, Aeroplan
issues Miles to members for the purchase of goods and services from
participating non-airline partners. The outstanding Miles may be redeemed for
travel or other goods and services.

         For additional information on the application of fresh start reporting
and the change in accounting policy, refer to page 8 of this MD&A.

         Based upon past experience, management anticipates that a number of
Aeroplan Miles sold will never be redeemed by members. This is known as
"breakage". For those Aeroplan Miles that Aeroplan does not expect will be
redeemed by members, Aeroplan recognizes revenue on a straight-line basis over
the average estimated life of an Aeroplan Mile, currently 30 months. The
Corporation performs regular evaluations on the breakage estimate which may
result in certain adjustments to revenues. During 2004, breakage was subject to
a change in accounting estimate reducing it from 19 per cent to 17 per cent.

         At December 31, 2005, the Corporation's estimated outstanding number
of Miles was approximately 183 billion, as compared to substantially the same
number at the end of the prior year. Management has recorded a liability of
$1,633 million, including $680 million in Aeroplan deferred revenues, for the
estimated number of Miles expected to be redeemed. A change to the estimate of
Miles expected to be redeemed could have a significant impact on the liability
in the period of change and in future periods.

         In 2005, 52 billion Miles (2004 - 46 billion) were redeemed
principally for travel. These redemptions represented approximately 10 per cent
of Air Canada's total revenue passenger miles in 2005 (2004 - 10 per cent).
Inventory controls over seat allocations keeps displacement of revenue
passengers to a minimum. Total Miles redeemed for travel on Air Canada in 2005,
including awards and upgrades, represented 78 per cent of the total Miles
redeemed, of which 60 per cent were used for travel within the US and Canada.
In addition to the awards issued for travel on Air Canada, approximately 16 per
cent of the total Miles redeemed in 2005 was used for travel on partner
airlines and 6 per cent were used for goods and services from non-airline
partners.

         A change to either the redemption patterns of the Miles or the award
options provided could have a significant impact on the Corporation's revenues
in the year of change as well as in future years.


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ACE Aviation Holdings Inc.                                              Page 71
2005 Management's Discussion and Analysis
<PAGE>


Future Income Taxes

         The Corporation utilizes the liability method of accounting for income
taxes under which future income tax assets and liabilities are recognized for
the estimated future tax consequences attributable to differences between the
financial statement carrying amount and the tax basis of assets and
liabilities. Future income tax assets are recognized to the extent that
realization is considered more likely than not. The Corporation considers past
results, current trends and outlooks for future years in assessing realization
of future income tax assets. The benefit of future income tax assets that
existed at fresh start, and against which a valuation allowance is recorded,
amounts to $2,334 million. This benefit will be recognized first to reduce to
nil any remaining intangible assets (on a pro-rata basis) that were recorded
upon fresh start reporting with any remaining amount as a credit to
Shareholders' Equity.

Impairment of Long-Lived Assets

         Long-lived assets are tested for impairment whenever the circumstances
indicate that the carrying value may not be recoverable by comparing the
estimate of future expected cash flows to the carrying amount of the assets or
groups of assets. If the carrying value is not recoverable from future expected
cash flows, any loss is measured as the amount by which the asset's carrying
value exceeds fair value. Recoverability is assessed relative to undiscounted
cash flows from the direct use and disposition of the asset or group of assets,
which requires management assumptions as to estimated future aircraft fair
values and estimated net future cash flows from use of the aircraft.

Property and Equipment

         Property and equipment are originally recorded at cost. Property under
capital leases and the related obligation for future lease payments are
initially recorded at an amount equal to the lesser of fair value of the
property or equipment and the present value of those lease payments. Property
and equipment are carried at the lesser of amortized cost and the net
recoverable amount.

         Property and equipment are depreciated to estimated residual values
based on the straight-line method over their estimated service lives. Property
and equipment under capital lease and variable interest entities are
depreciated to estimated residual values over the life of the lease. Air Canada
aircraft and flight equipment are depreciated over 20 to 25 years, with 10 to
15 per cent estimated residual values. Jazz aircraft and flight equipment are
depreciated over 20 to 30 years, with 20 per cent estimated residual values.
Aircraft reconfiguration costs are amortized over three years. Aircraft
introduction costs are amortized over three years. Betterments to owned
aircraft are capitalized and amortized over the remaining service life of the
aircraft. Betterments to aircraft on operating leases are amortized over the
term of the lease.

         Buildings are depreciated over their useful lives not exceeding 50
years on a straight-line basis (30 years in the Predecessor Company). An
exception to this is where the useful life of the building is greater than the
term of the land lease. In these circumstances, the building is depreciated
over the life of the lease. Leasehold improvements are amortized over the
lesser of the lease term or five years. Ground equipment is depreciated over
three to 25 years (five to 25 years in the Predecessor Company). Computer
equipment is depreciated over three years (five years in the Predecessor
Company).


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ACE Aviation Holdings Inc.                                              Page 72
2005 Management's Discussion and Analysis
<PAGE>



         Aircraft depreciable life is determined through economic analysis, a
review of existing fleet plans and comparisons to other airlines operating
similar fleet types. Residual values are estimated based on Air Canada's
historical experience with regard to the sale of both aircraft and spare parts,
as well as future based valuations prepared by independent third parties.

Intangible Assets
         The identifiable intangible assets of the Corporation were fair valued
based on valuation techniques for the purpose of financial reporting under
fresh start reporting requirements as at September 30, 2004. The indefinite
lives of the intangible assets recorded by the Corporation are significant and
are tested for impairment annually or more frequently if events or changes in
circumstances indicate that the asset might be impaired. In addition, the
Corporation is required to assess the remaining life of amortizable assets on a
regular basis.

         Fair value under Canadian GAAP is defined as "the amount of the
consideration that would be agreed upon in an arm's length transaction between
knowledgeable, willing parties who are under no compulsion to act". Assessing
the fair value of intangible assets requires significant management estimates
on future cash flows to be generated by the assets, including the estimated
useful life of the assets.



-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 72
2005 Management's Discussion and Analysis
<PAGE>

15.  SENSITIVITY OF CONSOLIDATED RESULTS

         Financial results of the Corporation are subject to many different
internal and external factors which can have a significant impact on operating
results. In order to provide a general guideline, the following table
describes, on an indicative basis, the financial impact that changes in
operating assumptions would generally have had on the consolidated 2005
operating results. These guidelines were derived from 2005 levels of activity
and make use of management estimates. The impacts are not additive, do not
reflect the interdependent relationship of the elements and may vary
significantly from actual results due to factors beyond the control of the
Corporation. Conversely, an opposite change in the sensitivity factor would
have had the opposite effect on operating income.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
                                                                                                     Estimated
                                                          2005                                       Operating
Key Variable                                             Measure     Sensitivity factor            Income Impact
------------                                             -------     ------------------            -------------
                                                                                                   ($ millions)
Revenue Measures

<S>                                           <C>            <C>     <C>                                    <C>
   Passenger yield (cents) (incl. Aeroplan)   System         17.6    1% change in yield                     78
                                              Canada         23.1                                           32

   Traffic (RPMs) (millions)                  System       46.764    1 % change in traffic                  71
                                              Canada       14,916                                           29

   Passenger load factor                      System         79.5    1 percentage point change              89

   RASM (cents) (incl. Aeroplan)              System         14.0    1% change in RASM                      74


Cost Measures

   Labour and benefits expenses ($ millions)                2,520    1 % change                             25

   Fuel - WTI price (US$/barrel)                            55.33    US$1/barrel change(1) to WTI           31

   Fuel - jet fuel price (cents/litre)                      59.39    1% change(1)                           22

   Cost per ASM (cents)                                      15.9    1% change                              94

-----------------------------------------------------------------------------------------------------------------
(1) Excludes impact of fuel surcharges and fuel hedging.
</TABLE>


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
                                                                          Estimated          Estimated
                               2005                                       Operating           Pre-Tax
Key Variable                  Measure     Sensitivity factor             Income Impact     Income Impact
------------                  -------     ------------------             -------------     -------------
                                                                         ($ millions)       ($ millions)
<S>                             <C>              <C>                         <C>                 <C>

Currency Exchange
<          Canada to US ($)      1.21             1 cent change               11                  39
                                          (e.g. $1.20 to $1.21)

------------------------------------------------------------------------------------------------------------
</TABLE>




-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 74
2005 Management's Discussion and Analysis
<PAGE>

16. RISK FACTORS

         The risk factors described herein may not be exhaustive. The
Corporation operates under frequently shifting business environments and new
risk factors may develop. The Corporation cannot forecast new risk factors, nor
can it estimate the effect, if any, that such new risk factors may have on its
businesses or the extent to which any factor or combination of factors may
impact the Corporation's business.

16.1.    Risks Relating to the Corporation

Operating Results

         The Predecessor Company sustained significant operating losses and the
Corporation may sustain significant losses in the future. The Predecessor
Company emerged from protection under the CCAA and implemented the consolidated
plan of reorganization, compromise and arrangement (the Plan) on September 30,
2004. Although the Corporation has been successful in reducing its operating
costs and is pursuing additional measures to further lower its costs and to
offset record high fuel expenses, the Corporation may not be able to
effectively achieve or maintain anticipated planned cost reductions or maintain
and restore positive net profitability.

Leverage and Liquidity

         The Corporation has, and will continue to have, a significant amount
of indebtedness, including fixed obligations under aircraft leases as outlined
in section 6.3 of this MD&A. The Corporation may incur additional debt,
including secured debt, in the future. The amount of indebtedness that the
Corporation incurs could have important consequences. For example, it could (i)
limit the Corporation's ability to obtain additional financing for working
capital, capital expenditures, acquisitions and general corporate purposes,
(ii) require the Corporation to dedicate a substantial portion of its cash flow
from operations to payments on its indebtedness, thereby reducing the funds
available for other purposes, (iii) make the Corporation more vulnerable to
economic downturns, (iv) limit its ability to withstand competitive pressures
and reduce its flexibility in responding to changing business and economic
conditions and, (v) limit the Corporation's flexibility in planning for, or
reacting to, changes in its businesses and the industries in which it operates.

Limitations Due to Restrictive Covenants

         Some of the financing arrangements entered into by the Corporation
contain restrictive covenants which affect and, in some cases, significantly
limit or prohibit, among other things, the Corporation's ability to incur
indebtedness, create liens, sell assets, make capital expenditures and engage
in acquisitions, mergers, amalgamations and consolidations. In addition,
certain financing arrangements require the Corporation to maintain financial
ratios. Any future borrowings may also be subject to covenants which limit the
Corporation's operating and financial flexibility, which could materially and
adversely affect the Corporation's profitability. If the Corporation fails to
comply with the various covenants of its indebtedness, it may be in default
under the terms thereof, which would permit holders of such indebtedness to
exercise certain rights, which may include accelerating the maturity of such
indebtedness, and, such defaults could cause defaults under other indebtedness
or agreements. In such circumstances, the lenders under the financing
arrangements could foreclose upon all or substantially all of the assets of the
Corporation which secure the obligations of the Corporation.



-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 75
2005 Management's Discussion and Analysis
<PAGE>

         The ability of the Corporation to make scheduled payments under its
indebtedness will depend on, among other things, its future operating
performance and its ability to refinance its indebtedness when necessary. Each
of these factors is to a large extent subject to economic, financial,
competitive, regulatory, operational and other factors, many of which are
beyond the Corporation's control. There can be no assurance that the
Corporation will be able to generate sufficient cash from its operations to pay
its debts and lease obligations.

Need for Additional Capital

         The Corporation is facing a number of challenges in its current
business operations, including high fuel prices and continued intense
competition from US transborder and low-cost domestic carriers. There can be no
assurance that the Corporation will continue to be able to obtain on a timely
basis sufficient funds on terms acceptable to the Corporation to provide
adequate liquidity and to finance the operating and capital expenditures
necessary to implement its new business strategy if cash flow from operations
and cash on hand are insufficient.

         Failure to generate additional funds, whether from operations or
additional debt or equity financings, may require the Corporation to delay or
abandon some or all of its anticipated expenditures or to modify its new
business strategy, which could have a material adverse effect on the
Corporation's business, results from operations and financial condition.
Furthermore, the ability of competitors to raise money more easily and on less
onerous terms could create a competitive disadvantage for the Corporation.

         In addition, the Corporation's credit ratings influence its ability to
access capital markets. There can be no assurance that the Corporation's credit
ratings will not be downgraded, which may add to the Corporation's borrowing
and insurance costs, hamper its ability to attract capital and limit its
ability to operate its business, all of which could have a material adverse
effect on the Corporation's business, results from operations and financial
condition.

Dependence upon Subsidiaries

         ACE is a holding company with no material sources of income,
operations or assets of its own other than the cash resources it holds totaling
approximately $400 million at December 31, 2005, the interest that it has in
its subsidiaries and the distributions it receives from its retained interests
in Aeroplan and Jazz. The Corporation is entirely dependent on the operations
and assets of its subsidiaries. Any possible declaration of dividends by the
Corporation to its shareholders will be dependent on the ability of its
subsidiaries to declare dividends or make other payments or advances to the
Corporation, or the sale by the Corporation of its interest in its subsidiaries
including its retained interests in Aeroplan and Jazz. The ability of the
Corporation's subsidiaries to make distributions or other payments or advances
will be subject to applicable laws and regulations and contractual restrictions
that may be contained in the instruments governing any indebtedness of those
entities. In addition, any right of the Corporation to receive assets of its
subsidiaries upon their liquidation or reorganization will be structurally
subordinated to the prior claims of creditors of such subsidiaries.



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ACE Aviation Holdings Inc.                                              Page 76
2005 Management's Discussion and Analysis
<PAGE>


Aircraft Fleet

         A key component of the Corporation's business plan is the
restructuring of its aircraft fleet, including the elimination and replacement
of older, less efficient aircraft, the introduction of new regional jet
aircraft (deliveries of which began in the fourth quarter of 2004), and the
modernization of its international widebody fleet through the acquisition of
new more economically efficient aircraft. With respect to the new regional jet
aircraft, the Corporation's focus is on high frequency on key domestic and US
transborder routes, while maintaining frequency on other domestic and US
transborder routes through the increased use of large regional jet aircraft
with lower trip costs in order to better match capacity with demand. Management
expects that these regional jet aircraft will enable Air Canada to compete more
effectively with low-cost carriers. Through the international widebody aircraft
fleet renewal, management expects that these aircraft will allow Air Canada to
place itself in a leadership position among North American international
airlines and enable the airline to compete more effectively alongside the
leading European, Middle East and Pacific carriers. A delay or failure in the
completion of the Corporation's fleet restructuring, including a delay in
delivery of the regional jet and widebody aircraft, or an inability to remove,
as planned, certain widebody aircraft from the fleet in coordination with the
planned entry into service of new widebody aircraft, could adversely affect the
implementation of the Corporation's business plan which may, in turn, have a
material adverse effect on the Corporation's business, results from operations
and financial condition.

Key Personnel

         The Corporation is dependent on the experience and industry knowledge
of its executive officers and other key employees to execute its business
plans. If the Corporation were to experience a substantial turnover in its
leadership or other key employees, the Corporation's business, results from
operations and financial condition could be materially adversely affected.
Additionally, the Corporation may be unable to attract and retain additional
qualified key personnel as needed in the future.

Employee Relations

         Most of the Corporation's employees are unionized and new or modified
collective agreements were concluded during the Predecessor Company's CCAA
restructuring with each of the bargaining agents. The collective agreements
permit bargaining on wages in 2006 but no strikes or lock-outs may lawfully
occur until after the agreements expire in 2009. Despite this, there can be no
assurance that there will not be a labour conflict that could lead to an
interruption or stoppage in service at key airports. Any labour conflicts could
have a material adverse effect on the Corporation's business, results from
operations and financial condition. In addition, labour problems at Air
Canada's Star Alliance partners, including Lufthansa and United Airlines, could
result in lower demand for connecting traffic with Air Canada and, ultimately,
could have a material adverse effect on the Corporation's business, results
from operations and financial condition.



-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 77
2005 Management's Discussion and Analysis
<PAGE>

Key Suppliers

         The Corporation's business is significantly dependent upon its ability
to secure goods and services from a number of key suppliers, such as those
relating to fuel and other key goods and services. An interruption in the
provision of goods or services from a key supplier could have a material
adverse impact on the Corporation's business, results from operations and
financial condition. Such interruptions or stoppages may arise from a wide
range of factors, including labour disputes and other factors, many of which
are beyond the Corporation's control.

Interruptions or Disruptions in Service

         The Corporation's business is significantly dependent upon its ability
to operate without interruption at a number of key airports, including Pearson
Airport. An interruption or stoppage in service at a key airport could have a
material adverse impact on the Corporation's business, results from operations
and financial condition.

Dependence on Technology

         The Corporation relies in part on technology, including computer and
telecommunications equipment and software and Internet-based commerce, to
operate its business, including to increase revenues and to reduce costs.
Proper implementation and operation of required technology initiatives is
fundamental to the Corporation's ability to operate a profitable business. The
Corporation continually invests in new technology initiatives to operate its
business and remain competitive, and its continued ability to invest sufficient
amounts in required technology initiatives is important to maintain the
Corporation's ability to operate successfully. A failure or inability to invest
in required technology initiatives could have a material adverse effect on the
Corporation's business, results from operations and financial condition.

         The technology systems of the Corporation, including computer and
telecommunications equipment and software and Internet-based technology
systems, may be vulnerable to a variety of sources of failure, interruption or
misuse, including natural disasters, terrorist attacks, telecommunications
failures, power failures, computer viruses, hackers, unauthorized or fraudulent
users, and other security issues. While the Corporation continues to invest in
technology security initiatives and disaster recovery plans, these measures may
not be adequate or implemented properly. Any such occurrence or event,
including by reason of power, telecommunication or Internet interruptions,
could materially and adversely affect the Corporation's operations and could
have a material adverse effect on the Corporation's business, results from
operations and financial condition.



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ACE Aviation Holdings Inc.                                              Page 78
2005 Management's Discussion and Analysis
<PAGE>


Pension Plans

         Canadian federal pension legislation requires that the funded status
of registered pension plans be determined periodically, on both a going concern
basis (i.e., essentially assuming indefinite plan continuation) and a solvency
basis (i.e., essentially assuming immediate plan termination).

         The solvency liability is influenced primarily by long-term interest
rates and by the investment return on plan assets. The interest rate used to
calculate benefit obligations for solvency purposes is a prescribed rate
derived from the interest rates on long-term Government of Canada bonds. In the
current low interest rate environment, the calculation results in a higher
present value of the pension obligations, leading to a larger unfunded solvency
position.

         In May 2004, the Corporation and OSFI agreed on a protocol pursuant to
which the solvency funding requirements for the Corporation's registered
pension plans provided for in the then existing regulations were amended
retroactive to January 1, 2004. The Corporation will have to make substantial
annual cash contributions, and the level of those contributions will increase
in the event of poor pension fund investment performance and/or further
declines in long-term Government of Canada bond rates.

Federal Court of Appeal Judgment - Equal Pay Litigation

         The flight attendants union at Air Canada has two complaints before
the Canadian Human Rights Commission in which it alleges gender-based wage
discrimination. The Canadian Union of Public Employees claims the predominantly
female flight attendant group should be paid the same as the predominantly male
pilot and mechanics groups because their work is of equal value. The complaints
date from 1991 and 1992, but have not been investigated because of a legal
dispute over whether the three groups work in the same "establishment" within
the meaning of the Canadian Human Rights Act (the Act). On January 26, 2006,
the Supreme Court of Canada ruled that they do, and remitted the case to the
Commission, which may now proceed to assess the value of each group's work.

         During the restructuring under CCAA, it was agreed that any resolution
of the complaints would have no retroactive financial impact prior to September
30, 2004. It is the view of Air Canada that any investigation will show that
that it is complying with the equal pay provisions of the Act. Nonetheless,
should these complaints succeed, the accrued liability and future costs could
be very significant and the Corporation's business, results from operations and
financial condition could be materially adversely affected.

Star Alliance

         The strategic and commercial arrangements with Star Alliance members
provide Air Canada with important benefits, including codesharing, efficient
connections and transfers, reciprocal participation in frequent flyer programs
and use of airport lounges from the other members. Should a key member leave
the Star Alliance or otherwise be unable to meet its obligations hereunder, the
Corporation's business, results from operations and financial condition could
be materially adversely affected.


-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 79
2005 Management's Discussion and Analysis
<PAGE>

Foreign Exchange

         The Corporation's financial results are sensitive to the changing
value of the Canadian dollar. In particular, the Corporation has a significant
annual net outflow of US dollars and is affected by fluctuations in the
Canada/US dollar exchange rate. The Corporation estimates that during 2005, a
$0.01 increase in the Canada/US dollar exchange rate (i.e. from $1.20 to $1.21
per US dollar) would have had an estimated $11 million unfavourable impact on
operating income and an estimated $39 million unfavourable impact on pre-tax
income. Conversely, an opposite change in the exchange rate would have had the
opposite effect on operating income. The Corporation incurs significant
expenses in US dollars for such items as fuel, aircraft rental charges,
interest payments, debt servicing and computerized reservations system fees,
while a substantial portion of its revenues are generated in Canadian dollars.
A significant deterioration of the Canadian dollar relative to the US dollar
would increase the costs of the Corporation relative to its US competitors and
could have a material adverse effect on the Corporation's business, results
from operations and financial condition.

Business Initiatives

         The Corporation aggressively identifies and pursues important and
innovative initiatives in the course of operating its business. Proper planning
and implementation of these initiatives is important to the Corporation's
profitability. There can be no assurance that these initiatives will be
successfully implemented or achieve expected results. A failure to successfully
implement such initiatives could have a material adverse effect on the
Corporation's business, results from operations and financial condition.


-------------------------------------------------------------------------------
ACE Aviation Holdings Inc.                                              Page 80
2005 Management's Discussion and Analysis
<PAGE>


16.2.  Risks Relating to the Industry

Competition

         Air Canada operates within a highly competitive industry. Over the
past few years, several carriers have entered or announced their intent to
enter into domestic and US transborder markets in which Air Canada operates.

         Canadian low-cost airlines have significantly expanded in many of Air
Canada's key domestic markets and have entered the US transborder market as
well. Canjet operates flights to New York and Florida (during the winter) and
WestJet provides regular scheduled service to Nevada, Hawaii, Florida,
California, New York and Arizona. In February 2006, Porter Airlines announced
its intent to offer short-haul flights from Toronto Island Airport to Canadian
and US cities using 70-seat Q400 Bombardier turboprop aircraft.

          If these carriers are successful in entering or continuing their
expansion into the domestic and US transborder markets of Air Canada, the
Corporation's business, financial condition and results from operations could
be materially adversely affected.

         US carriers currently operate routes in Air Canada's transborder
market. If additional US carriers were to enter Air Canada's transborder
market, or if US carriers were to introduce additional transborder services,
this could have a material adverse effect on the Corporation's business,
results from operations and financial condition.

         The Corporation is also facing increasing competition in international
markets as carriers increase their international capacity, both by expansion
and by shifting existing domestic capacity to international operations to avoid
low-cost domestic competition. If these carriers are successful in their
expansion in the international markets, or if other carriers enter Air Canada's
markets, the Corporation's business, financial condition and results from
operations could be materially adversely affected.

         The Corporation also encounters substantial price competition. The
expansion of low-cost carriers in recent years has resulted in a substantial
increase in discounted and promotional fares initiated by competitors. The
decision to match competitors' fares, to maintain passenger traffic, results in
reduced yields which, in turn, could have a material adverse effect on the
Corporation's business, results from operations and financial condition.
Furthermore, the Corporation's ability to reduce Air Canada's fares in order to
effectively compete with other carriers may be limited by government policies
to encourage competition. Such government policies could have a material
adverse effect on the Corporation's business, results from operations and
financial condition.

         Internet travel websites have driven significant distribution cost
savings for airlines, but have also enabled consumers to more efficiently find
lower fare alternatives by providing them with access to more pricing
information. The increased price awareness of both business and leisure
travelers as well as the growth in new distribution channels have further
motivated airlines to price aggressively to gain fare and market share
advantages. These factors will increase over time as Internet ticket sales
increase, which will


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ACE Aviation Holdings Inc.                                              Page 81
2005 Management's Discussion and Analysis
<PAGE>



reduce yields and, in turn, could have a material adverse effect on the
Corporation's business, results from operations and financial condition.

Airline Reorganizations

         Since September 11, 2001, a number of US air carriers have sought to
reorganize under Chapter 11 of the United States Bankruptcy Code. Successful
completion of such reorganizations (such as the successful emergence of US
Airways and its merger with America West as well as the expected emergence of
United Airlines) could present the Corporation with competitors having reduced
levels of indebtedness and significantly lower operating costs derived from
labour, supply and financing contracts that were renegotiated under the
protections of the Bankruptcy Code. In addition, air carriers involved in
reorganizations historically have undertaken substantial fare discounting in
order to maintain cash flows and to enhance continued customer loyalty. Such
fare discounting could result in lower yields for the Corporation which, in
turn, could have a material adverse effect on the Corporation's business,
results from operations and financial condition.

Economic and Geopolitical Conditions

         Airline operating results are sensitive to economic and geopolitical
conditions which have a significant impact on the demand for air
transportation. Airline fares and passenger demand have fluctuated
significantly in the past and may fluctuate significantly in the future. The
Corporation is not able to predict with certainty market conditions and the
fares Air Canada and Jazz will be able to charge. Customer expectations are
changing rapidly and the demand for lower fares may limit revenue
opportunities. A downturn in economic growth in North America, as well as
geopolitical instability in various areas of the world, would have the effect
of reducing demand for air travel in Canada and abroad and, together with the
other factors discussed herein, could materially adversely impact the
Corporation's profitability. Any prolonged or significant weakness of the
Canadian and world economy could have a material adverse effect on the
Corporation's business, results from operations and financial condition,
especially given the Corporation's substantial fixed cost structure.

Airline Industry Characterized By Low Gross Profit Margins and High Fixed Costs

         The entire airline industry and scheduled service in particular are
characterized by low gross profit margins and high fixed costs. The costs of
operating each flight do not vary significantly with the number of passengers
carried and, therefore, a relatively small change in the number of passengers
or in fare pricing or traffic mix could, in the aggregate, have a significant
effect on the Corporation's operating and financial results. This condition has
been exacerbated by aggressive pricing by low-cost carriers, which has had the
effect of driving down airline fares in general. Accordingly, a minor shortfall
from expected revenue levels could have a material adverse effect on the
Corporation's business, results from operations and financial condition.


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ACE Aviation Holdings Inc.                                              Page 82
2005 Management's Discussion and Analysis
<PAGE>

Dependence of Other Operating Entities

         Many of the risks factors in the nature of those described herein,
should they materialize, could have a material adverse effect on the
Corporation's other operating entities, including Air Canada, Air Canada Cargo,
ACGHS, Jazz, ACTS and Aeroplan, either directly, or indirectly, by affecting
the air transportation industry generally and/or other air carriers, on which
these other operating entities rely for the success of their business, results
from operations and financial conditions.

Fuel Costs

         Fuel costs were the second largest expense to the Corporation in 2005.
Fuel prices fluctuate widely depending on many factors including international
market conditions, geopolitical events and the Canada/US dollar exchange rate.
The Corporation cannot accurately predict fuel prices. During 2003, 2004 and
2005, fuel prices increased and currently remain at historically high levels.
Should fuel prices continue at, or continue to increase above, such high
levels, fuel costs could have a material adverse impact on the Corporation's
business, results from operations and financial condition. Due to the
competitive nature of the airline industry, the Corporation may not be able to
pass on any increases in fuel prices to its customers by increasing its fares.
Based on 2005 volumes, the Corporation estimates that a US$1 per barrel
movement in the average price of West Texas Intermediate (WTI) crude oil would
have resulted in an approximate $31 million change in 2005 fuel expense for Air
Canada (excluding any impact of fuel surcharges and fuel hedging), assuming
flying capacity remained unchanged and that refining spreads between WTI crude
oil and jet fuel as well as foreign exchange rates remained constant.

         In order to help minimize the Corporation's exposure to the volatility
of fuel prices, a systematic fuel risk management strategy has been implemented
using financial instruments to build up the Corporation's hedge position in
increments of approximately 4 per cent per month to a target level of
approximately 50 per cent of its anticipated jet fuel requirements, beginning
in September 2005, for a 24-month period.

Terrorist Attacks

         The September 11, 2001 terrorist attacks and subsequent terrorist
attacks, notably in the Middle East, Southeast Asia and Europe, caused
uncertainty in the minds of the traveling public. The occurrence of a major
terrorist attack (whether domestic or international and whether involving the
Corporation or another carrier) could have a material adverse effect on
passenger demand for air travel and on the number of passengers traveling on
Air Canada's flights. It could also lead to a substantial increase in insurance
and airport security costs. Any resulting reduction in passenger revenues
and/or increases in insurance and security costs could have a material adverse
impact on the Corporation's business, results from operations and financial
condition.

Epidemic Diseases (Severe Acute Respiratory Syndrome, Avian Flu or Other
Diseases)

         As a result of the international outbreaks of Severe Acute Respiratory
Syndrome (SARS) in 2003, the World Health Organization (the "WHO") issued on
April 23, 2003 a travel advisory, which was subsequently lifted on April 30,
2003, against non-essential travel to Toronto, Canada. The WHO travel advisory
relating to Toronto, the location of Air Canada's primary hub, and the
international SARS outbreak had a significant adverse effect on passenger
demand for air travel destinations served by Air


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ACE Aviation Holdings Inc.                                              Page 83
2005 Management's Discussion and Analysis
<PAGE>


Canada and Jazz, and on the number of passengers traveling on Air Canada's and
Jazz's flights and resulted in a major negative impact on traffic on the entire
network. A further outbreak of SARS or of another epidemic disease (whether
domestic or international) or a further WHO travel advisory (whether relating
to Canadian cities or regions or other cities, regions or countries) could have
a material adverse effect on passenger demand for air travel and on the number
of passengers traveling on Air Canada's and Jazz's flights. Any resulting
reduction in traffic on Air Canada's and Jazz's network could have a material
adverse effect on the Corporation's business, results from operations and
financial condition.

Seasonal Nature of the Business, Other Factors and Prior Performance

         Air Canada has historically experienced considerably greater demand
for its services in the second and third quarters of the calendar year and
significantly lower demand in the first and fourth quarters of the calendar
year. This demand pattern is principally a result of the high number of leisure
travelers and their preference for travel during the spring and summer months.
The Corporation has substantial fixed costs that do not meaningfully fluctuate
with passenger demand in the short term.

         As described elsewhere, demand for air travel is also affected by
factors such as economic conditions, war or the threat of war, fare levels and
weather conditions. Due to these and other factors, operating results for an
interim period are not necessarily indicative of operating results for an
entire year, and operating results for a historical period are not necessarily
indicative of operating results for a future period.

Regulatory Matters

         The airline industry is subject to extensive Canadian and foreign
government regulations relating to, among other things, security, safety,
licensing, competition, noise levels and the environment. Additional laws and
regulations may be proposed from time to time which could impose additional
requirements or restrictions on airline operations. The implementation of
additional limitations by governments, the Competition Bureau and/or the
Competition Tribunal or other governmental entities may have a material adverse
effect on the Corporation's business, results from operations and financial
condition. The Corporation cannot give any assurances that new regulations or
revisions to the existing regulations will not be adopted. The adoption of such
new regulations or revisions could be materially adverse to the Corporation's
business, results from operations and financial condition.

         The availability of international routes to domestic air carriers is
regulated by agreements between Canada and foreign governments. Changes in
Canadian or foreign government aviation policy could result in the alteration
or termination of these agreements and could adversely affect the Corporation's
international operations.

         In July 2000, the Government of Canada amended the Canada
Transportation Act (CTA), the Competition Act and the Air Canada Public
Participation Act (Canada) to address the competitive airline environment in
Canada and ensure protection for consumers. This legislation increased the
powers of the Canadian Transportation Agency with respect to pricing on non
competitive domestic routes, and domestic terms and conditions of carriage.


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ACE Aviation Holdings Inc.                                              Page 84
2005 Management's Discussion and Analysis
<PAGE>

         This legislation also included airline specific provisions concerning
"abuse of dominance" under the Competition Act, including the establishment of
administrative monetary penalties for a breach of the "abuse of dominance"
provision by a dominant domestic air carrier. In February 2001, the Competition
Bureau released for consultation draft guidelines outlining the approach it
proposed to take in enforcing the airline specific "abuse of dominance"
provisions of the Competition Act.

         In March 2001, the Commissioner of Competition brought an application
under the "abuse of dominance" provisions of the Competition Act, seeking an
order prohibiting Air Canada from charging fares on flights on certain routes
in Eastern Canada if such fares would not cover the avoidable costs of such
flights. By agreement of Air Canada and the Commissioner of Competition, the
application was divided into two phases, Phase I of which considered the
approach to be taken in reviewing an avoidable cost case against Air Canada.
The Competition Tribunal released its reasons and findings regarding Phase I on
July 22, 2003, and adopted a broadly crafted avoidable cost test. The decision
of the Competition Tribunal does not constitute a determination that Air Canada
breached the Competition Act by abusing its dominant position, which is an
issue that would have been determined in Phase II of the application.

         In September 2004, following extensive discussions with Air Canada
about resolving the tribunal case and related issues, the Commissioner of
Competition issued a letter describing the enforcement approach to be taken by
the Competition Bureau to any new complaint made against a dominant domestic
carrier in light of the changes in the airline industry that have occurred
since 2000. The Commissioner has also indicated support for the repeal of the
airline specific provisions at the Competition Act, although the timing for
such legislative changes is unknown given the recent change in the Federal
Government following the January 23, 2006 elections.

         In light of these developments, and as part of the agreement to
terminate the application to the Competition Tribunal, Air Canada determined
that it would not appeal the Competition Tribunal's decision in Phase I of the
application. The Competition Bureau has expressed its view that the principles
established by the Competition Tribunal in Phase I of the application regarding
the application of the avoidable cost test would be relevant for any future
cases which may arise in similar circumstances. If the Commissioner of
Competition commences inquiries or brings similar applications with respect to
significant competitive domestic routes and such applications are successful,
it could have a material adverse effect on the Corporation's business, results
from operations and financial condition.

         The Corporation is subject to domestic and foreign laws regarding
privacy of passenger and employee data that are not consistent in all countries
in which the Corporation operates. In addition to the heightened level of
concern regarding privacy of passenger data in Canada, certain US and European
government agencies are initiating inquiries into airline privacy practices.
Compliance with these regulatory regimes is expected to result in additional
operating costs and could have a material adverse effect on the Corporation's
business, results from operations and financial condition.


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ACE Aviation Holdings Inc.                                              Page 85
2005 Management's Discussion and Analysis
<PAGE>


Increased Insurance Costs

         The terrorist attacks of September 11, 2001 (9/11), and the resulting
staggering losses to the insurance industry, led to a significant increase in
Air Canada's insurance premiums. While this premium increase has steadily
decreased since 9/11, premiums have not returned to pre 9/11 levels and
continue to negatively impact the financial results of the Corporation. In
addition, the aviation insurance industry is continually reevaluating the
terrorism risks that they do cover and this activity may adversely affect some
of the Corporation's existing insurance carriers or the Corporation's ability
to obtain future insurance coverage. To the extent that the Corporation's
existing insurance carriers are unable or unwilling to provide it with
insurance coverage, the Corporation's insurance costs may increase further and
may result in the Corporation being in breach of contractual arrangements
requiring that specific insurance be maintained, which may have a material
adverse effect on the Corporation's business, results from operations and
financial condition.

Third Party War Risk Insurance

         There is a risk that the Government of Canada may not continue to
provide an indemnity for third party war risk liability coverage, which it is
currently providing to the Corporation and certain other carriers in Canada. In
the event that the Government of Canada does not continue to provide such
indemnity or amends such indemnity, the Corporation and other industry
participants would have to turn to the commercial insurance market to seek such
coverage. Such coverage would cost the Corporation in excess of $24 million per
year. Alternative solutions, such as that envisioned by the International Civil
Aviation Organization (ICAO) and the International Air Transport Association
(IATA), have not developed as planned, due to actions taken by other countries
and the recent availability of supplemental insurance products. ICAO and IATA
are continuing their efforts in this area, however, the prospects for a global
solution are not in the immediate or near future. The US federal government has
set up its own facility to provide war risk coverage to US carriers, thus
removing itself as a key component of any global plan.

         Furthermore, the London aviation insurance market has introduced a new
standard war and terrorism exclusion clause to apply to aircraft hull and
spares war risk insurance, and intends to introduce similar exclusions to
airline passenger and third party liability policies, that excludes claims
caused by the hostile use of a dirty bomb, electromagnetic pulse device, or
biochemical materials. The Government of Canada indemnity program is designed
to address these types of issues as they arise, but it has not yet decided to
extend the indemnity to cover this exclusion. Unless and until the Government
of Canada does so, the loss of coverage exposes the Corporation to this new
uninsured risk and may ultimately result in the Corporation being in breach of
contractual arrangements, which may have a material adverse effect on the
Corporation's business, results from operations and financial condition.


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ACE Aviation Holdings Inc.                                              Page 86
2005 Management's Discussion and Analysis
<PAGE>



Casualty Losses

         Due to the nature of its core operating business, the Corporation may
be subject to liability claims arising out of accidents or disasters involving
aircraft on which the Corporation's customers are traveling or involving
aircraft of other carriers maintained or repaired by the Corporation, including
claims for serious personal injury or death. There can be no assurance that the
Corporation's insurance coverage will be sufficient to cover one or more large
claims and any shortfall may be material. Additionally, any accident or
disaster involving one of the Corporation's aircraft or an aircraft of another
carrier maintained or repaired by the Corporation may significantly harm the
Corporation's reputation for safety, which would have a material adverse effect
on the Corporation's business, results from operations and financial condition.

Airport User Fees and Air Navigation Fees

         With the privatization of airports over the last several years in
Canada, new airport authorities have imposed significant increases in airport
user fees. If airport authorities continue to increase their fees at the rate
at which they have increased them in the recent past, the Corporation's
business, results from operations and financial condition could be materially
adversely affected.


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ACE Aviation Holdings Inc.                                              Page 87
2005 Management's Discussion and Analysis
<PAGE>


17.  CONTROLS AND PROCEDURES

17.1.  Disclosure Controls and Procedures

         Disclosure controls and procedures within the Corporation are designed
to provide reasonable assurance that all relevant information is identified to
its Disclosure Policy Committee to ensure appropriate and timely decisions are
made regarding public disclosure.

         An evaluation of the effectiveness of the Corporation's disclosure
controls and procedures, as defined under the rules of the Canadian Securities
Administration (CSA) and the Securities and Exchange Commission (SEC), was
conducted at December 31, 2005 by and under the Corporation's management,
including the Chief Executive Officer and the Chief Financial Officer. Based on
this evaluation, the Chief Executive Officer and the Chief Financial Officer
have concluded that the Corporation's disclosure controls and procedures are
effective.

17.2.  Internal Controls over Financial Reporting

         Internal controls over financial reporting are designed to provide
reasonable assurance regarding the reliability of the Corporation's financial
reporting and compliance with generally accepted accounting principles in its
financial statements.

         The Corporation's management have evaluated whether there were changes
to its internal controls over financial reporting during the year ended
December 31, 2005 that have materially affected, or are reasonably likely to
materially affect, its internal controls over financial reporting. No such
changes were identified through management's evaluation.


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ACE Aviation Holdings Inc.                                              Page 88
2005 Management's Discussion and Analysis
<PAGE>


18.  OUTLOOK

         Over the past two years, the Corporation has implemented a new
business model, restructured its operations, improved employee and asset
productivity, reduced operating costs and established a new corporate and
capital structure with reduced financial leverage. This has resulted in
improved financial results and competitive position.

         The Corporation is committed in 2006 to deliver its business plan
including continued expansion of the new business model and improved cost and
productivity through process re-design and technological enhancements. Key
pillars of the 2006 plan are to:

o    Grow revenues and customer loyalty, through further enhancement of the new
     business model including expansion of the subscription pass product.

o    Deliver a superior customer experience with new aircraft and significantly
     improved in-flight product.

o    Improve customer access to products and business unit productivity through
     simplifying processes, technology and process re-design.

o    Improve labour relations and employee involvement.

o    Enhance shareholder value through expansion of key businesses and
     potential monetization.

Transportation Services

         The airline business, in 2006, plans to increase its system ASM flying
capacity by approximately 5 per cent compared to 2005. With the introduction of
large regional jets, North American operations are expected to grow by
approximately 7 per cent with greater point to point services. Jazz flying, in
terms of ASMs, is planned to increase by over 50 per cent from the prior year
in order to benefit from the lower operating costs of this business segment.

         Low-cost carriers have achieved success in the North American market
and a number of legacy carriers have or are in the process of restructuring
their operations to lower costs and improve their competitive position. As a
result, passenger fares and yields per RPM are expected to remain under
pressure in 2006. Over the past 21 months, the Corporation has achieved record
load factors with the successful implementation of its new business model. Load
factors are expected to remain high in 2006, however, they may not continue at
record levels. With competitively priced passenger fares, operating higher load
factors enables greater revenue generation per flight and higher efficiency of
ground and support operations.

         The new Bombardier and Embraer regional jets allow the Corporation to
offer greater aircraft frequencies and operate more profitably on specific
routes with relatively fewer passengers per flight as compared to larger
aircraft operated by either Air Canada or its low-cost carrier competition.
Deliveries of the new Embraer-190 aircraft continue in 2006 and 45 of these
aircraft are expected to be in service by early 2008. With these new aircraft,
the Corporation is progressively expanding its point-to-point network to
enhance its ability to compete with low-cost carriers operating larger aircraft
on specific routes.


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ACE Aviation Holdings Inc.                                              Page 89
2005 Management's Discussion and Analysis
<PAGE>

         A cornerstone of the Corporation's strategy going forward will be the
growth of its international operations. In order to support the expansion of
these operations and deliver a superior customer product, the Corporation will
be taking delivery of new Boeing 777 series aircraft beginning in 2007 and the
highly efficient Boeing 787 aircraft commencing in 2010.

         The airline industry is subject to numerous factors and costs over
which it has little or no control (more fully described in the Risk Factors
section). These include crude oil and jet fuel prices and quasi-government or
airport authority fees for airport or navigation charges amongst others. With
crude oil prices trading in the record US$65-70 range and refining spreads
subject to continuing volatility, fuel expense remains a major risk in 2006.
The Corporation has progressively implemented fuel hedging in 2005 and has been
able to mitigate a portion of previous fuel price increases through higher
passenger and cargo charges. However, the pricing of crude oil and jet fuel is
subject to market forces and it is not certain whether the Corporation will be
able to mitigate, in a meaningful way, continuing record fuel prices in a
highly competitive airline environment. 2005 saw major increases in airport
fees especially at its main hub in Toronto. Further increases were implemented
in 2006, but at a lower rate than in 2005. Nonetheless, these costs will
continue to increase during the year.

         In 2006, the Corporation has a wage review covering most of its
unionized employees under the collective agreements which expire in 2009.

Aeroplan

         In 2006, Aeroplan will further enhance its partnerships and
value-added services, as well as remain favourable to strategic acquisition
opportunities, whilst sustaining a meaningful distributable cash growth.

         It will also pursue further cost reductions and efficiency gains in
operations, particularly with respect to call centre productivity improvements
and use of web-based service products. New practices, such as work-at-home for
the call centre agents, will also be investigated.

Jazz

         The recent Jazz public offering is in support of ACE's value
enhancement strategy. Management remains fully committed to delivering
continued improvements in financial and operational results in the future.

         By July 2006, Jazz's operating fleet is scheduled to reach 135
aircraft.

         Effective January 1, 2006, an amended and restated capacity purchase
agreement with Air Canada, the CPA, will, among other things, establish the
rates to be paid by Air Canada to Jazz for 2006 through 2008 and the minimum
number of covered aircraft until December 2015. Management anticipates that
substantially all of Jazz's currently contemplated growth will be attributable
to the CPA with Air Canada and the increased fleet contemplated by such
agreement.


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ACE Aviation Holdings Inc.                                              Page 90
2005 Management's Discussion and Analysis
<PAGE>



ACTS

         As it begins its second full year as a stand-alone organization, ACTS
will continue to work on developing its business model and will focus on its
operations and productivity to improve financial results.

         Increased productivity, enhanced processes and systems, cost
improvement and sustainable growth will be ACTS's priorities in 2006. In
addition, ACTS will continue to focus on meeting customer production
requirements.



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ACE Aviation Holdings Inc.                                              Page 91
2005 Management's Discussion and Analysis
<PAGE>


19. SUBSEQUENT EVENTS

19.1.  Jazz Air Income Fund

         On February 2, 2006, the Jazz Air Income Fund (the Fund) sold 23.5
million units at a price of $10 per unit for net proceeds of approximately $222
million. The Fund is an unincorporated, open-ended trust created to indirectly
acquire and hold 19.1 per cent of the outstanding limited partnership units of
Jazz. ACE holds the remaining 80.9 per cent of the outstanding limited
partnership units of Jazz.

         The Fund has granted to the underwriters an over-allotment option (the
Over-Allotment Option), exercisable for a period of 30 days following the
Closing Date, to purchase up to 3.525 million additional units at $10 per unit
for net proceeds of $33 million. In the event the underwriters exercise the
Over-Allotment Option in full, the Fund and ACE will hold 22 per cent and 78
per cent of the outstanding limited partnership units of Jazz respectively.

         Pursuant to the limited partnership agreement, 20 per cent of Jazz's
limited partnership units are subordinated by ACE in favour of the Fund until
December 31, 2006. Distributions on the subordinated units will only be paid by
Jazz to the extent that Jazz has met and paid its distributable cash target to
the Fund as the holder of non-subordinated units.

         In connection with the offering, the establishment of $150 million
senior secured syndicated credit facilities was completed. On closing of the
offering, $115 million was drawn under the credit facilities. The facility
bears interest at floating rates and has a three-year term.

19.2.  Non-unionized Labour Reductions

        In February 2006, the Corporation announced that certain ACE companies
will proceed with the reduction of non-unionized staffing levels by 20 per
cent. The non-unionized staff reductions are expected to take place primarily
at Air Canada, Air Canada Cargo, ACGHS, and ACTS. The costs of this program
will be recorded during the first quarter of 2006 once the details of the plan
are finalized.


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ACE Aviation Holdings Inc.                                              Page 92
2005 Management's Discussion and Analysis






<PAGE>


A.     Disclosure Controls and Procedures

Disclosure controls and procedures are defined by the U.S. Securities and
Exchange Commission (the "Commission") as those controls and procedures that are
designed to ensure that information required to be disclosed by ACE Aviation
Holdings Inc. (the "Registrant") in reports filed or submitted by it under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Commission's rules and forms. The
Registrant's Chief Executive Officer and its Chief Financial Officer have
evaluated the Registrant's disclosure controls and procedures as of the end of
the period covered by this Annual Report on Form 40-F and have determined that
such disclosure controls and procedures are effective.

B.     Changes in Internal Control Over Financial Reporting

Since the most recent evaluation of the Registrant's internal control over
financial reporting, there has not been any significant change in the
Registrant's internal control over financial reporting that has materially
affected or is reasonably likely to materially affect, the Registrant's internal
control over financial reporting.

C.     Notice of Pension Fund Blackout Period

The Registrant was not required by Rule 104 of Regulation BTR to send any notice
to any of its directors or executive officers during the fiscal year ended
December 31, 2005.

D.     Audit Committee Financial Expert

The Registrant's board of directors has determined that David I. Richardson, an
individual serving on the audit committee of the Registrant's board of
directors, is an audit committee financial expert within the meaning of General
Instruction B(8)(a) of Form 40-F. Mr. Richardson is independent as that term is
defined in the rules and regulations of the Nasdaq Stock Market, Inc.

         The Securities and Exchange Commission has indicated that the
designation of a person as an audit committee financial expert does not make
such person an "expert" for any purpose, impose any duties, obligations or
liability on such person that are greater than those imposed on members of the
audit committee and the board of directors who do not carry this designation or
affect the duties, obligations or liability of any other member of the audit
committee or board of directors.

E.     Code of Ethics

The Registrant's board of directors has adopted a code of ethics (the "Code")
that applies to its Chief Executive Officer, Chief Financial Officer and
Corporate Controller. The Registrant will provide a copy of the Code, without
charge, to any person that requests a copy by contacting the Registrant's
Secretary at the address that appears on the cover of this Annual Report.

F.     Principal Accountant Fees and Services

       Audit Fees

The aggregate fees billed by PricewaterhouseCoopers LLP, the Registrant's
principal accountant, for the period from June 29, 2004, the date of
incorporation, to December 31, 2004 and for the fiscal year ended December 31,
2005 for professional services rendered by it for the audit of the
Registrant's annual financial statements and for services that are normally
provided by it in connection with statutory and regulatory filings or
engagements for such years were Cdn$3,356,851 and Cdn$4,161,299, respectively.

         Audit-Related Fees

The aggregate fees billed by PricewaterhouseCoopers LLP for the period from
June 29, 2004, the date of incorporation, to December 31, 2004 and for the
fiscal year ended December 31, 2005 for assurance and related services
rendered by it that are reasonably related to the performance of the audit or
review of the Registrant's financial statements and are not reported above as
audit fees were Cdn$321,269 and Cdn$242,015, respectively. Audit-related fees
were paid for professional services related to pension plan audits, specified
procedures reports and other items related to the audit.

       Tax Fees

The aggregate fees billed by PricewaterhouseCoopers LLP for the period from
June 29, 2004, the date of incorporation, to December 31, 2004 and for the
fiscal year ended December 31, 2005 for professional services rendered by it
for tax compliance, tax advice and tax planning were Cdn$459,108 and
Cdn$21,750, respectively. Tax fees were paid for professional services
rendered with respect to commodity and income taxes.

       All Other Fees

Other than the audit fees, audit-related fees and tax fees described above,
PricewaterhouseCoopers LLP has not billed other fees to the Registrant for the
period from June 29, 2004, the date of incorporation, to December 31, 2004 and
for the fiscal year ended December 31, 2005 for products and services provided
by it.

       Pre-Approval Policies and Procedures

All audit and non-audit services performed by the Registrant's principal
accountant for the years ended December 31, 2004 and December 31, 2005 were
pre-approved by the audit committee of the Registrant.

G.     Off-Balance Sheet Arrangements

See "Management's Discussion and Analysis of Financial Condition and Results of
Operations for the year ended December 31, 2005 - Off-Balance Sheet
Arrangements", included in Document No. 3 to this Annual Report.

H.     Tabular Disclosure of Contractual Obligations

See "Management's Discussion and Analysis of Financial Condition and Results
of Operations for the year ended December 31, 2005", included as Document No.
3 to this Annual Report.

I.     Identification of Audit Committee

The Registrant has an audit committee comprised of three individuals: David I.
Richardson (Chair), W. Brett Ingersoll and John T. McLennan. Each of the
members of the audit committee is independent as that term is defined by the
rules and regulations of the Nasdaq Stock Market, Inc.

J.     Critical Accounting Policies

See "Management's Discussion and Analysis of Financial Condition and Results
of Operations for the year ended December 31, 2005 - Critical Accounting
Estimates", included as Document No. 3 to this Annual Report.



<PAGE>



                 UNDERTAKING AND CONSENT TO SERVICE OF PROCESS

A.     Undertaking

The Registrant undertakes to make available, in person or by telephone,
representatives to respond to inquiries made by the Commission staff, and to
furnish promptly, when requested to do so by the Commission staff, information
relating to the securities in relation to which the obligation to file an annual
report on Form 40-F arises, or transactions in said securities.

B.     Consent to Service of Process

The Registrant has previously filed with the Commission a Form F-X in connection
with its Class A Variable Voting Shares and Class B Voting Shares.


<PAGE>



                                   EXHIBITS

           The following exhibits are filed as part of this report:

    Exhibit
    -------
    Number     Title
    ------     -----


       1.     Consent of PricewaterhouseCoopers LLP
      31.     Certifications of CEO and CFO pursuant to Section 302 of the
              Sarbanes-Oxley Act of 2002
      32.     Certification of CEO and CFO pursuant to Section 906 of the
              Sarbanes-Oxley Act of 2002


<PAGE>


                                   SIGNATURE

         Pursuant to the requirements of the Exchange Act, the Registrant
certifies that it meets all of the requirements for filing on Form 40-F and has
duly caused this annual report to be signed on its behalf by the undersigned,
thereto duly authorized.


                                     ACE AVIATION HOLDINGS INC.


March 31, 2006                       By:    /s/ BRIAN DUNNE
                                            ------------------------------------
                                     Name:  Brian Dunne
                                     Title: Executive Vice-President and
                                            Chief Financial Officer


<PAGE>

                                  EXHIBIT INDEX



   Number     Document
   ------     --------

       1.     Consent of PricewaterhouseCoopers LLP
      31.     Certifications of CEO and CFO pursuant to Section 302 of the
              Sarbanes-Oxley Act of 2002
      32.     Certification of CEO and CFO pursuant to Section 906 of the
              Sarbanes-Oxley Act of 2002