RBC: Estimates higherQ4 Airlines & Aerospace Preview
Our view:
We keep our estimates unchanged with the exception of AC, bringing estimates higher on lower fuel costs offset by lower capacity growth assumptions in 2024, and CAE, which we adjusted down on Civil margin. Our Cdn Airlines & Aerospace Heatmap powered by RBC ElementsTM points to continued weak leading indicators and robust coincident indicators (pg 2). In addition, we note Cdn/US airfare CPI continues to trend negatively, directionally supported by our proprietary Canadian Airfare Index. Key given US peers' guidance is predicated on continued higher fares to offset the higher cost environment due to new labour agreements and MRO costs. Overall, we expect guidance updates in Q4 with details of each below..................
Q4 estimate revisions
• AC: Estimates higher on lower fuel costs offset by lower capacity in 2024; price target increases to $18 (from $17); reaffirm Sector Perform rating. We are increasing our Q4/23 estimate to $524MM (from $439MM) vs consensus of $539MM, strictly on the benefit from lower fuel prices. For 2024, we previously anticipated a return to 2019 capacity levels by 2024. However, given the robust capacity ramp-up over the last two years, OEM delays, and MRO slowdowns, we reduce our capacity assumption for AC to -3% vs. 2019 (or +10% y/y). Our 2024 estimate of $3,209MM remains below consensus of $3,765MM and guidance of $3.5B to $4B as we see multiple headwinds facing the airline industry, including the sustainability of higher fares, increased new entrants, and higher labour costs. Given the challenging operating environment (supply-chain challenges, MRO delays, high costs, and geopolitical downside risks), we believe AC will leave 2024 EBITDA guidance unchanged. Our target price moves to $18 on higher 2025E EBITDA applied to our unchanged target multiple of 3.5x.