RE:RE:So much for a bailout Good Morning Logicandinertia,
your points in bold and italicized.
"...Air Canada will ask flight attendants to slash their schedules, go on leave for up to two years or resign with travel privileges."
brutal for those poor folks.
Essentially, what is going on here is what I alluded to in a previous response to you. With the retirement of 79 aircraft, the airline now has a staffing plan in place, and they have notified the respective unions of future staffing levels. Flight attendants, and other employee groups, are being asked if they would like to work share (for example, fly half-blocks for flight and cabin crew), take a leave-of-absence (go back to school to finish a degree, etc) or retire with enhanced travel privileges. Lots of employees stay longer than they want to just to get their lifetime travel passes. Based on my previous experience during several downturns, all of these options are taken-up, thus reducing the final number of staff that will be furloughed. Furthermore, airline employees are for the most part resilient. They know in their first few years of their career a reasonable probability exists that a lay-off could occur.
From the CBC:
The airline said it is currently flying at about five per cent of the capacity it flew last year and hopes to ramp up to 25 per cent later in the year if government-imposed travel restrictions are eased. Landry said in the memo that the airline was burning $22 million a day.
"Sadly, today the hard truth is that by every indicator we have available to us, we believe that we will be materially smaller for at least three years," Craig Landry, Air Canada's executive vice-president of operations, said in the memo.
When I read these memos I always ask who the intended audience is. Is it the employees and their respective unions? Or in this case, is it the government, knowing that this memo will be leaked?
Over the last couple months, the US airlines have been communicating a similar message to their employees. The reality is no one really knows what the demand is going to be later this year, and into next year. That is why part of the compensation to the U.S. carriers involved grants and low-interest loans require the airlines retain staff until October 1st. But U.S. airline CEOs are frustrated.
Here is an excerpt from the London Financial times earlier this week about the U.S. airlines:
“European carriers have announced waves of cuts — up to 12,000 jobs at British Airways, 3,000 at Ryanair, just in the past fortnight — but US airlines are still at the planning stage. United’s incoming chief executive, Scott Kirby, said he would cut cash burn from $40m a day now towards $30m a day in the third quarter and then $20m a day in the fourth, if travel has not rebounded. “The difference between that third-quarter number and that fourth-quarter number is really about employees,” he told investors earlier this month. Some airline bosses tried to offer the government more equity in exchange for less onerous conditions, including giving the carriers the flexibility to close some uneconomical flying routes and cutting jobs, said the person involved in the talks. The government, however, was pursuing twin aims of ensuring airlines would still be there at the end of the pandemic and that employees would be retained, even if taxpayers were funding their salaries.”
Like British Airways, Ryanair and other European airlines, Air Canada is executing on its new capacity plan and staff cuts that will significantly reduce cash burn and return the airline to profitability in 2021 and onwards, something the U.S. carriers are currently unable to do.
I think what is happening here is that Calin has had enough of the lingering border restrictions and mandatory self-isolation periods, which were initially implemented to combat a virus with an estimated mortality rate that turned out to be several orders higher than it actually is (there is fairly wide consensus on that at this point). I believe the leaking of Friday’s document is a message to Trudeau to get on with re-opening the economy and the US/CDA border. Right now, the Government seems content to just handout money in spite of widespread re-openings across the world, placating the public in the short-term while indebting them in the long-term. As Churchill said, when you're going through hell, keep going!
and to those who still believe there is a chance of a big govt bailout after this, think about the optics and give your head a shake.
Again, Air Canada is not asking for a government bail-out. It may be that the Government eventually enhances whatever aid they’re providing for the sector, but AC’s balance sheet makes the term “bailout” an ill-befitting phrase. The Government knows the industry has been damaged both by the pandemic’s impact on demand, as well as the Government’s policies. Airlines are of strategic importance, and Governments will likely try to maintain a competitive international position… but this is a far-cry from GM and the bank bailouts of 08.
On AC’s side, they are merely proceeding with a plan to reduce capacity to meet expected demand going into 2021. Again, the same thing occurred in previous downturns. Admittedly, greater uncertainty this time, but nonetheless, they have a plan, and are executing it.
I put together a VALUATION analysis that was criticized/mocked by the Tin Hat Brigade for being too conservative. These assumptions were revenue getting back to a run rate of 80 percent of 2019 levels by mid 2021 . This would now appear mind numbingly optimistic. Be careful out there.
No one criticized/mocked your Valuation analysis. In fact I used your base-line 2020 end-year cash/cash equivalents balance and 2021 revenue /EBITDA projections and adjusted them based on my knowledge of the industry and company. Your mid-2021 to mid-2022 revenue projection of $15 billion is less than TD’s for the same period. I believe AC’s 2021 EBITDA will be higher than expected for the following reasons:
Until 2019 Air Canada was in growth mode, and there is a cost to growth. New routes mean lower load factors initially, additional staff, additional training costs, etc. In an economic downturn, and a subsequent period of slow growth, you don’t have these costs – staffing levels can remain tight, and load factors high. Moreover, older mostly leased airplanes with higher fuel consumption rates, higher maintenance costs, and less dense seating have been/are being replaced with new owned aircraft that have operating costs at least 10-12 percent lower. The price of oil is also expected to remain low for the next couple of years, a large part of any airline’s budget.
And with reduced capacity, likely lower than demand, yields will be higher. NA airlines over the last ten years have been very good at managing capacity but they realized last year with the Boeing MAX grounding, even less capacity in the marketplace meant much higher yields. This is clearly in the minds of airline CEOs as the plan capacity reductions going forward.
Finally, sixth freedom traffic growth will resume after an almost two-year hiatus, with the ungrounding of the Boeing Max and loyalty revenue will continue to grow, as the company grows credit card members from 5 million to 7 million. I cannot emphasize the financial benefits of the Airline’s new loyalty program enough – a definite game-changer for them. Between 2004 and 2018, Air Canada was disadvantaged by not having an in-house loyalty program, a significant impairment to earnings.
As for the EV/EBITDA multiple my argument for a higher multiple (similar to what the U.S. airlines were assigned) on the other side of this crisis is mathematically driven, the fact that reinvestment rate is the dominant variable for this multiple, and Air Canada’s reinvestment rate is decreasing from a very high percentage – at times over 100 percent – to a much, much lower percentage. And by 2022, TD forecasts Air Canada adjusted net debt to ebitda ratio to be 1.6x, about where it was at the end of 2018. This multiple is within investment grade territory so it should not suppress the P/E multiple.
Also, keep in mind that ROIC, a proxy for cash flow, is the primary focus for most airline CEOs these days, and Air Canada will do whatever is necessary to drive this financial measure higher.
So I would not characterize my assumptions leading to a higher EBITDA and EV/EBITDA as mind numbingly optimistic.
Hope this helps,
Airlineinvestor, (from the tin-hat brigade)