Snapshot or could be a movieFinances whether personal or business use 3 tools. There is the budget. For a business like AC this is presented in the Income Statement and the Cash Flow reports. Tool number 2 is the balance sheet where you examine the relationship of your Assets and your Liabilities. This is the most ignored tool in the toolbox for finance and the importance of this tool is preached by a man named Warren Buffet. Ignore his coaching and it is your folly. He is all about what is going on in the balance sheet. Then you need a plan. This is the tool that is less used than the balance sheet by those seeking to understand finance. Business plans seem to be pretty important for successful business. A sound business plan is great and the proper execution of a sound business plan results in financial nirvana.
The Budget
The Income statement. The first thing addressed is a total of all the revenues from all of the streams of income that come in. These are the income from passenger ticket sales and fees, cargo income transport and transfer fees plus documentation fees, Air Canada's portion of the take from the revenue that flows through the Aeroplan Loyalty card product (3.7% of 28% of the total spend) and there may be some portion from feeder services. All of these were clearly defined Air Canada owned products years ago but were sold off for value creation or dimished due to poor returns.
Currently most have been revived and are in the process of being enhanced to add to the volume of these streams of income which will result in a much larger and stable river of income into Air Canada's coffers.
We all know the passenger revenue is going through a healing process. The important thing is that more money is being produced with the same number of physical assets (aircraft). It is the same number of aircraft but each has more seats than the airplane it replaced.
Aeroplan membership and spend is growing. It is noted that 3.7% of the 28% of total revenue will capture $4.4 billion of cash by the end of 2025.
Cargo is back and is back for real. The pump was primed during covid with the conversion of 11 passenger aircraft to freight aircraft. By the end of 2022 AC will have 4 to 6 767-Fs including 2 new factory built versions. I think that leaves 4 more retrofits left to be converted in 2023 and 2 777-F freighters to be added in 2024. Currently AC Cargo has similar revenue numbers to Cargojet with only 2 freighters plus the bellies of the passenger jets. This should be pretty impressive growth in with revenue predicted here in 2022 of $1.5 billion with only 2 of 10 freighter aircraft working.
There is talk of a buy back of the JAZZ feeder airline. That is a future story.
The backside of the income statement is where does all the money go. 2019 was a very good year and then Covid hit. Bills were getting paid. 38 of 44 787s were bought and paid for. That was paid with billions of FCF. This was just after the 737s got grounded. 26 were paid for with cash.
During this time some really brilliant management happened because those assets were paid for. By working with Boeing and helping them thru the 737 crisis Air Canada recieved considerations that rendered the rest of the order paid for in product and considerations. These are well discusssed.
It cost more to run the airline than what was coming in. When they went to borrow, the money was there. The government needed to make Air Canada borrow some money and give them some warrants to assert that it was serving the Canadian public. Air Canada will never escape being a political football.
The second half of the borrowing story is that just before interest rates started rising, all of ACs borrowing needs were renegotiated with the average interest rate on the loans being less than 4%. I was just at the bank today. That is the savings deposit rate today not the borrowing rate. And that is thru to the end of the decade. That is like a person nailiing the 5 year mortgage rate the family home at about the same time. I did it and I can tell you I saved my self a lot of money going forward and the finance department at AC saved AC shareholders mountains of money with those deals.
Air Canada spends less than other airlines for its assets because it owns them and what debt they do have, they pay less interest than other businesses because of that. Air Canada also has much stronger revenue streams and cash income streams and more revenue streams than it has ever had before. They are at that point that one article by Airlineinvestor was named "JAILBREAK".
Here is the Chart:
Five year Estimated Free Cash Flow
in Billions of dollars
2022 0.5 to 1.0+ .....By Q2 AC already has reached 0.5
2023 3.0
2024: 3.6
2025: 3.8
2026: 4.0
Total 15.0 B in free cash flow over 5 years
Less: 5.8 B principal debt repayment
Less: 2.0 B in net interest charge
Net: 7 B in free cash flow available for investment opportunities.
Warren Buffet is right. It is all about what you do with your assets. Ignore earnings for now. Just follow the assets and the FCF. And ignore analysts.