2020 Revised EPS and FCF Estimates – Boeing SettlementAt the February 28, 2019 Investors’ Day, Air Canada provided new free cash flow guidance of $4-$4.5 billion for 2019-2021. Total interest payments for the three-year period is just under $1.3 billion (source: financial statements), so the amount of capital that can potentially be returned to shareholders is about $3 billion.
With Capex decreasing from approximately $2.8 billion in 2019 to $1.6 billion in 2021, and 2019 free cash flow guidance of $400-$600 million, free cash flow was going to increase to well over $2.0 billion by 2021. The lengthy Max grounding – now with a mid-2020 recertification date – has pushed the MAX capex program into 2021 such that the spend is now approximately even in 2020 and 2021.
For the two-year period – 2019 and 2020 – approximately $2 billion can be returned to shareholders (after annual interest payments are factored in). Even if Air Canada announces a one percent dividend this quarter, there would still be about $1.9 billion available for the re-purchase of shares given a quarterly pay-out would stretch into 2021.
Approximately 5.7 million shares were re-purchased in 2019 for approximately $200 million. Share count at the beginning of 2020 was just under 265 million. Assuming an average share price of $55 between now and year-end, an additional 30 million shares could be re-purchased this year reducing the share count to about 235 million by year-end 2020. For the purpose of calculating 2020 basic earnings per share, the average share count would be 250 million for the year.
Using data from S&P Capital IQ:
Consensus 2020 Basic EPS is $4.88 based on net income of $1.285 billion and a share count of 263.3 million.
Consensus 2020 Adjusted Diluted EPS is $4.37 based on adjusted net income of $1.168 billion and a fully diluted share count of 267.2 million.
However, assuming 30 million shares are re-purchased this year, then for 2020:
Basic EPS $1.285 billion /250.0 million = $5.14
Adjusted Diluted EPS $1.168 billion /254.0 million = $4.60
Capital IQ consensus estimates for 2020 earnings have decreased over the last year from $4.80 to $4.37, as the MAX grounding has creeped into 2020. Only recently has there been clarity concerning compensation to airlines, and so the consensus estimates likely do not reflect any kind of compensation from Boeing. In the February 2nd post, the estimated cash settlement for 2020 is $567 million.
Using the Capital IQ consensus 2020 (unadjusted) Net Income, let’s factor in the Boeing Compensation.
Estimated compensation: $567
Tax (27%) $153
$414 million
2020 Net Income: $1.285
Addition to net income: $0.414
Revised Net Income $1.699 billion
Basic EPS $6.80 (previous $5.14)
Changes to Fleet
In the Full Year 2018 MD&A report (February 15, 2019), the fleet plan showed four Airbus A330 wide-body aircraft entering the fleet to replace six older Boeing B767s. The B767s were to leave the fleet in 2019; however, based on the latest quarterly MD&A, five of these aircraft are showing exiting the fleet sometime in 2020. The decision to delay the exit of these aircraft are most likely linked to the MAX grounding. The Airline also acquired two more Airbus A330s for a (2019) year-end total of 14, a year-over-year increase of six wide-body aircraft.
The original 2019 fleet plan also called for four Airbus 321 narrow-body aircraft joining the fleet (acquired from WOW airlines during a financial restructuring in late 2018) . These aircraft were delivered in the first half of 2019. Another four Airbus A321s (not part of the original 2019 fleet plan) were delivered by the end of Q3. All Airbus aircraft mentioned above are early to mid-life aircraft acquisitions.
This year, the Company will take delivery of an additional three Airbus A220 aircraft and should have 18 in the fleet by end-June 2020, in time for the busy third quarter. The Airline will also take delivery of one more Airbus A330 for a total of 15, an increase of 7 wide-body aircraft since early 2018.
These 2019 and first half 2020 fleet additions will provide greater flexibility in managing the MAX grounding while enabling the Airline to achieve modest growth (estimated to be at least 3.5%) in 2020 and importantly avoiding negative growth in Q3, unlike Q3 2019. Given the reduction in China flying in Q1 resulting from the coronavirus, a 3.0% capacity growth is assumed for 2020.
Based on the above fleet analysis, accounting for share buybacks and including the estimated Boeing cash compensation, my estimates for 2020 are as follows:
Available Seat Miles (ASMs)
Revenue Passenger Miles (RPMs)
Passenger Revenue per RPM (Yield)
Operating Revenue per ASM (RASM)
Passenger Revenue per ASM (PRASM) (yield x load factor)
Cost per ASM (CASM)
Operating Margin per ASM (RASM – CASM)
2019 2020
Revenue (million) 19,278 20,206 (4.8%)
ASMs (millions) 112,748 116,130 (3.0%)
Passenger Load Factor % 83.5 83.7
Yield (cents) 18.44 18.81 (2.0%)
PRASM 15.4 15.74
RASM (cents) 17.10 17.44
Adjusted CASM (cents) 11.63 11.92 (2.5%)
Fuel per ASM (cents) 3.89 3.58 (-8.0%)
CASM (cents) 15.42 15.50
Operating Margin per ASM (cents) 1.58 1.96
Operating Income 1,781 2,276
Non-Operating Income (Expense)
Interest Income 165
Interest Expense (433)
Interest Capitalized 45
Foreign Exchange Gain (Loss) (180)
Other Non-Operating Income (Expense) (90)
Other (Boeing Compensation) 567
Total Non-Operating Income 74
EBT 2,350
Income Tax 635
Net Income 1,715
Basic Earnings Per Share $6.86
Diluted Earnings Per Share $6.75
Adjusted Diluted Earnings Per Share $5.58
Note: USD/CAD Exchange Rate: 0.752
Share Price Target
Today’s closing price of $46.35 and 2020 consensus EPS of $4.37 yields a P/E multiple of 10.6x.
Applying this ratio to the Adjusted EPS of $5.58, results in a target price of $59.18.
However, the Boeing compensation will have a material impact on Air Canada’s 2020 earnings and free cash flow, and what ultimately determines a company's intrinsic value is the present value of future free cash flows. Therefore, the more relevant earnings estimate is $6.75, which captures Boeing's estimated compensation to Air Canada.
Applying the 10.6 multiple to this estimate yields a target share price of $71.55.
Free Cash Flow Adjustment – Boeing Compensation
The two components to the Boeing compensation plan are cash to be paid out this year, and discounts on future MAX deliveries and maintenance parts, etc. The free cash flow for the cash component is the after-tax amount of $414 million calculated earlier in this post. For the non-cash payout, let’s assume that 80 percent of the estimated in-kind amount of $340 million ($272 million) will be in aircraft discounts. We only have visibility on the first 50 Max aircraft to be delivered, and with 24 already with the airline, then the $272 million will be spread over the remaining 26 aircraft to be delivered this year and next. That works out to $10.4 million per aircraft. Twelve aircraft will likely be delivered this fall, and the remaining 14 in 2021.
Free cash flow for 2020 should increase by $539 million:
$414 (after-tax cash compensation)
$125 (12 x $10.4)
$539 m
Free Cash flow for 2021 should increase by $145 million:
$145 m (14 x $10.4)
Total free cash flow guidance for the 2019-2021 period should be increased by $685 million ($539 m + $145 m).
Cash and reduced capex spend resulting from the Boeing settlement should push the upper boundary of the 2019-2021 free cash flow guidance comfortably into the $5-$6 billion range.