National BankQ3 results ahead of forecast Air Canada reported its results for Q3 ended September 30th. Results were ahead of NBF and consensus forecasts. Overall results: highlights • Revenue was $6,344 million versus NBF at $5,990 million and the consensus of $6,096 million (up 19% y/y and up ~14% versus Q3/19). AC’s capacity was up 9.8% y/y in Q3 and the load factor came in at 89.8% versus NBF at 88.0%. Passenger yield was up 6.8% y/y (we were looking for a 1.0% increase) while passenger unit revenue (RASM) was up 10.8%. Except for Domestic (down 0.1%), yields were up in all markets with the Atlantic (+12.7%) and Pacific (+10.7%) notably strong. Overall yield was up 26.6% versus Q3/19. • Adjusted unit cost (CASM) came in at $0.122 (+5.6% y/y) versus our forecast for $0.121. • Adjusted EBITDA was $1,830 million, well above NBF at $1,551 million and the consensus for $1,568 million. We note that the Q3/23 EBITDA is considerably higher than the $1,472 million AC reported in Q3/19. • Free cash flow was $135 million versus our forecast for $10 million. • Air Canada ended Q3 with cash and equivalents of $8.9 billion. Leverage fell to 1.4x versus 1.7x at the end of Q2. Air Canada expecting to hit high end of 2023 EBITDA guidance • EBITDA guidance for 2023 remains $3.75-$4.0 billion and Air Canada indicates that it expects to be at the high end of the range. We currently forecast $3.7 billion and the consensus is also $3.7 billion. 2023 capacity growth is now planned at 20% versus 2022 compared to 21% previously. Adjusted CASM is now expected to be 1.5-2.25% above 2022 versus up 0.5-1.5% previously (we currently forecast CASM up 1.5% y/y). The change is driven by the slight reduction in planned capacity growth as well as general cost inflation. • We note that bookings remain strong with advance ticket sales at the end of Q3 sitting at $4.5 billion, down from $5.7 billion at the end of Q2/23 due to normal seasonality, but up significantly from $2.9 billion at the end of Q3/19. Our initial take: positive We maintain our Outperform rating and $32.00 target on Air Canada shares while we review our model. Although there are concerns around the strength of the consumer and growing domestic competition for Air Canada, demand for air travel still appears to be strong, and we expect that ongoing positive market conditions should drive earnings and cash flow improvement for Air Canada through the remainder of 2023 and into 2024. In the meantime, with the stock trading at just 3.3x EV/EBITDA on our current 2024 forecast, we would argue that the market is already pricing in a significant market slowdown. We value the stock by applying a 4.5x EV/EBITDA multiple to our 2024 EBITDA forecast.