RBC: Target at 20$
Q4 results well below expectations; new/revised guide highly contingent on demand
Our view: From a strategic perspective, we believe AC is doing all the right things in terms of positioning the company for the post-pandemic future. We agree with the company's re-fleeting strategy, its cost realignment efforts and emphasis on (re)newed products such as loyalty. That said, we are more cautious on the aspects outside the company's control (infrastructure challenges, recessionary impact on demand and pricing, business travel rebound, cost inflation, increased small player competition, etc.). Accordingly, our estimates are and remain below guidance and consensus. Remain SP.
Key points:
• Q4/22 well below. EBITDA of $389MM was notably below consensus $500MM (RBC: $353MM). The weaker results were mainly due to higher costs as the company over-staffed to ensure appropriate service levels given strong demand and constrained infrastructure capacity. As shown in Exhibit 1, revenue was in line, but adj. CASM was well higher, resulting in the lower EBITDA.
• New guidance suggests strong demand and pricing will be an offset to cost inflation. AC provided new 2023 guidance, and rebased its prior 2024 guidance (outlined in Exhibit 4), with EBITDA guidance in 2023 ($2.5B to $3B) and 2024 ($3.5B to $4B) bracketing consensus ($2.9B and $3.8B, respectively). Key is that this is contingent on: 1) resolution to the airport infrastructure capacity; 2) no meaningful impact to demand from macro; and 3) demand and (ticket prices) remaining robust. It also assumes that new competition from (smaller) domestic players is mitigated and business travel rebounds completely. We have a more cautious view on these trends, which is reflected in our estimates below.
• Free cash flow lowered on higher spend on freighters. Mgmt. reduced its 2022-24 cumulative FCF guide to $2.5B (from $3.5B) on a higher capex devoted toward air cargo freighters. While international air freight pricing has come down substantially from its peak, the company believes that the outlook remains strong in international air freight. That said, the market reaction to the Q4 report today suggests that lower FCF targets (+ higher costs) are not being well-received.
• Remain on the sidelines on AC as we stay below guidance on longerterm targets. While the new EBITDA 2023 and 2024 guidance brackets consensus estimates in each period, we have a somewhat more cautious view on the demand environment, the sustainability of pricing, the impact of new small airline competition domestically and the rebound in business travel. Accordingly, we are taking our estimate down to the low end of the range for 2023 and remain below guidance and consensus for 2024. Our EBITDA goes to $2.5B (from $2.8B) in 2023E (vs. guide of $2.5B to $3B) and our estimate remains at $3.1B for 2024 (vs. guide of $3.5B to $4B). Given the lower cash impact from higher capex spending, our price target decreases slightly to $20 from $21. Reiterate Sector Perform.