Q1/Q2 2024 Performance (Updated) DEMAND (CATSA): 2024 demand is holding strong as expected. First 7 weeks of 2024 CATSA traffic volume came at 98.4% of 2019 and 109% of 2023. Usually last week of Jan and Feb have lower traffic and then picks up till summer end. AC mentioned that they will increase Q1 capacity by 10% and that will take it to 92.4% of 2019 (still below 2019) maintaining yields at least at the 2023 levels. Both numbers show that AC is managing capacity well and we can continue to expect strong yields. Remember, AC only focuses selectively Domestic demand (only 26% of 2023 revenue) and continues to expand international footprint (in high yield markets: re-starting pacific region, other regions). At least one of the LCC player in Canada might fold.
In US, First 7 week 2024 traffic came at 6.2% higher than 2023. For US airlines, 2023 was the full capacity (after covid) year and now they are in their first growth year. Canada is 1 year behind.
AC is focused on catering more profitable international travel. This will keep load factor high and bring more revenue per ASM (Available seat mile), leading to strong yield.
Based on analyst call, we can safely assume near term demand trends are strong leading to strong Q1 and Q2 results. Executives were also confident of 2024 demand trends. AC execs are usually conservative and if they are confident, we can trust their assumptions. CAPACITY: Forecasted 2024 capacity increase (~6-8% higher than 2023) is being well managed. If YTD 2024, increased demand (98.4%-90.4% = 8pp) is proportionately (as per last year) allocated to AC and other airlines, two scenarios are possible:
- AC capacity/traffic increases by ~10pp resultant load factor will be similar (~85%).
- AC capacity/traffic increases by <10pp resultant load factor will be >85%.
I am assuming other players like westjet etc.. ran smooth operations smoothly in Jan and did not loose passengers. If not, AC proportion would be higher from total increase this year leading to higher load factor or higher capacity.
YIELD/REVENUE: Yields will stay strong Demand, so far in 2024 is robust and capacity well managed by AC. In such environment, yields will stay strong (at least same as 2023 if not better). Remember, higher capacity doesn’t necessitate higher yield but higher load factors do. Expanding Aeroplan program, will also help AC improve yields. Given AC is more focused on higher yield travel (not lower yield domestic travel), I am assuming 1.0% higher yield in Q1 over Q4.
Q1 and Q2 PERFORMANCE Q1 is 60% completed and most of the remaining tickets for Q1 are already sold. Most of the Q1 fuel (low prices) is already purchased and remaining will be in coming weeks. Advanced tickets sales usually peak 3-6 weeks before flight. After adjusting for pilot salary increases, at end of Q1, conservatively we can expect following:
- TTM EBITDA > $4.1B
- Strong Cash Flow from Operations than $1.5B (Q1 2023).
- Net debt ~ $3.7B
- Leverage ratio of ~0.9
With similar trends, for Q2, with 7% increase in capacity, yields as in 2023 and fuel price at CAD $1.13/litre we can expect following for Q2: - TTM EBITDA > $4.1B
- Strong Cash Flow from Operations than $1.4B (Q1 2023).
- Net debt ~ $3.0B
- Leverage ratio of ~0.7 (Compares with the best such as Ryan Air)
First 2 Qs are the highest FCF Qs for the airline. All said and done, in 4 months from now, AC will achieve a very reasonable net debt of $3.0B, similar to pre-covid net debt). All above, after capital spending $2.6B as mentioned in MD&A. If capital spend turns out to be lower, results will be even sweeter. Airlines have the options of postponing aircraft deliveries if demand doesn’t flow through.
AC is managing their risks very well. This will put AC amongst the best financially managed airlines in the world such as Ryan Air. 2024 will come out to be even better year than 2023.
Stock price: Pre-covid, at above parameters, sp was >$50 with EV/EBITDA ratio of 4.5 and PE ratio of ~10. By Q2 end we should be:
- For same EV that of pre-covid, sp should be at $40.
- For same PE ratio that of pre-covid, sp should be at >$50
Since market valuations are lower, using analysts targets
For EV/EBITDA ratio of 3.1, sp should be at ~$28.
- For PE ratio of 5, sp should be at ~$30.
For coming years (2024-2027), read previous posts to understand how AC will be able produce substantial FCF even with higher capital commitments. I will update on this topic in few days.