Air Canada in near term Q3 proved to be better than I had expected. I was expecting approx. $0 cash daily cash burn but it turned out to be $1.7M daily cash generation. Key highlights.
- Cash flow: Daily cash flow of $1.7M. Even if we subtract wage subsidy of $103M from Q3, cash flow is still positive (+$0.5M daily). Free cash flow of $120M is the most important factor here.
- Capacity: Looks very conservative to me. They said 66% reduction in capacity meaning @ 34% of 2019 capacity. The way I read this is, July capacity was much lower than 34% but Aug and Sept capacity was much higher. CFO mentioned that their July EBITDA was negative but for Aug and Sept it was positive. For EBITDA to be -$67M for Q3, July had to be much lower than Aug and Sept
- Load factor: Load factor was ~71%, higher than analyst estimates, but lot lower than 2019.
- Fuel: Fuel price was generally similar/higher than 2019/20 but AC could respond better because of a shorter booking curve (possibly average below 6 weeks, which I had assumed earlier). We can safely assume booking curve peak at about 3-4 weeks.
- Labor: Generally speaking no major concerns.
- Markets: Except for Pacific (China/HK/Aus) and US market, most markets are in positive direction.
- Interest cost: Lowered (sub 4%) this cost and CEO felt very comfortable carrying higher debt as debt servicing cost is manageable for few years. Use the spare cash (lots of it, since no more cash burn) to buy fleet with cash in coming many quarters/years.
- Cargo: Capacity, revenue and yields are improving.
- Aeroplan: Much better than expected. Esp for premium travel.
Looking forward to Q4:
- Capacity: Projected capacity is 47% lesser than 2019 Q4. It means 53% of 2019 Q4 and approx. 60-70% of current fleet deployment (current fleet size is smaller than 2019).
- My assumption is that 47% being average, December capacity will be higher (let’s say 60% of 2019) and that should go into Q1 2022 as a baseline.
- AC always stays conservative in their projections. I believe actual Q4 capacity could be closer to 60% of 2019 Q4.
- US market opening to international travel in few days. Australia flight (1) starting in December. Pre COVID, AC had 3 daily flights to Australia and that meant deploying 7-8 widebody aircraft (4-5% of total capacity) to this market.
- Load factor: This will play a bigger role. Last minute capacity increase in Aug and Sept ended up with lower factor but load factor for ‘this’ capacity should be higher in Q4. No specific numbers in mind. This will help manage increased fuel price.
- Labor: No shortages generally speaking as they have approx.. 27000 employees (out of ~ 38000 at peak) back already. No more wage subsidy ($103M in Q3) though.
- Fleet and debt: Min near term debt maturity will give them lot of flexibility. Debt carrying cost is very low (compared to history). Allows them to buy new fleet using cash at hand and cash generated by operations. Aggressive plans to acquire more aircraft (seven 737s in q4 and nine more next year). ‘No cash burn’ guidance going forward shows that Air Canada is comfortable to fund new fleet with positive cash generation. They have done this before (2012-2019) and will do it again. But this time, lot lesser capital (last remaining narrow body aircraft) is required.
- Cargo: Continuing to be strong in revenue and yield. If passenger demand goes higher, some cargo business can shift from dedicated freighters to belly of widebodies. No matter what, eventually, they have will have dedicated cargo freighters (767s …)
- Fuel: Fuel price is higher than 2020 and seems like it will end up similar to 2018/19 fuel price in Q4. Fuel is purchased approx.. 6 weeks in advance (except spot buy in less frequent airports). Shorter booking curves (as per CMO) allows AC to respond with higher ticket price. Not a major concern as of now and CFO mentioned that future curve is downward for now. And favorable foreign exchange will continue to help.
- Aeroplan: New card launching in Q4. Avg card spend is higher than 2019 and contributions are better than expected. My estimate is that this one factor will boost cash flow to the record levels in coming 4-6 quarters. For Q4, this will keep AC in the positive.
- EBIDTA: I think Q4 EBIDTA will be positive. Based on the fact, that Aug and Sept month EBIDTA were positive.
- Cash flow: I see strong positive cash flow in Q4. I am not going to use straight line calculation cause that will lead to a much higher number. But following factors will help
- Higher load factor
- Increased capacity
- Increasing demand (opening of US and Australia markets, current markets, strong sun market)
- Fuel price and no wage subsidy to be mitigated by shorter booking curves (higher ticket price)
- We are 7-8 weeks away from year end and no COVID related escalations are on the horizon.
My conservative estimate for Q4 is cash flow generation of $250M+ . In the best case scenario, AC will buy new aircraft (outlook capital spend of $400M) with cash flow and still end up cash on the table.