TP Upgrade! Scotia. $9 to $11 Recent Update Text as of 4JUN14
. AC's May traffic exceeded our expectations.
. AC's consolidated traffic grew 10% on 8% ASM growth. This resulted in a
consolidated LF of 83.3% (up 150 bps YOY). Traffic grew in the teens in
Transborder, Atlantic, and LATAM, all of which are big Rouge routes. The "worst"
market was Canada, where traffic was up a strong 5% YOY. Loads rose in all
segments except Atlantic (down 210 bps). Rouge traffic remains strong with LF of
84.9%, but this is down from ~90% in Q1.
. AC's traffic growth remains surprisingly strong, and we are raising our 2014
EBITDAR estimates to reflect the strength. This was partially offset by a lower
yield assumption as AC is facing tougher comps in Q2, the Rouge 767 operation is
ramping up, and the traffic growth may have come at the expense of price in some
areas.
. Our TP is raised to $11 due to higher estimates and a revised multiple of 4.75x
based on strength in airline comp multiples. We expect the shares to react well
to these traffic results that are likely better than most expectations. The LT
cost take-out story is continuing to play out as expected and to-date the
traffic results suggest that AC's capacity increase has been well received.
Potential yield degradation and customer acceptance of Rouge over the LT remain
risk factors, in our view. The next few quarters should provide additional color
on this.
Turan Quettawala, MBA, CFA (Scotia Capital Inc. - Canada)
turan.quettawala@scotiabank.com / (416) 863-7065
EDGE Scotiabank GBM