RBC: View unchangedResults below; guidance reaffirmed
Our view:
While Q1 results came in below expectations on lower
than expected margins, the company made solid progress in growing
transborder and APAC segments and focused on efficiencies. Key from the
call was early indicators that corporate travel is improving, up 10% from
US traffic, which could have positive implications on yield. Nevertheless,
we remain cautious on AC given the higher debt burden of Canadian
consumers and see headwinds this year on higher operating costs. Longerterm we believe focusing on profitable capacity expansion, demographic
trends, and an upgraded fuel efficient fleet will serve the airline well.
Remain SP.
Key points:
Q1/24 below. EBITDA of $453MM came in below our $468MM, and
consensus $512MM. Revenue was in line on 1% higher than guided
capacity, however higher costs impacted results (margin of 8.7% vs cons.
9.9%) resulting in the weaker print.
RASM and yields weaker; corporate travel showing positive signs. RASM
came in lower by -2.2% (vs our -2.6%) driven by 0.5% lower loads and
-1.6% lower yields. Yields in the quarter driven by Transatlantic (-5.2%) and
offset by strong domestic (3.5%) and US transborder (1.6%). Key is AC noted
business travel from the US increased 10% in the quarter, with demand in
Canada relatively flat. We view this as a positive driver of yield for AC should
it continue and be replicated in the Canadian marketplace, noting US peers
recently spoke to strong rebounds in the segment.
Guidance reaffirmed. Despite the lower print, mgmt reiterated 2024
guidance on the back of strong growth expected in transborder and APAC
routes. Add to that, the company spoke to efficiency gains beginning to
take hold by expanding capacity 11% and FTEs by only 7% in the quarter.
Additionally, the company pointed to sequential improvement in CASM on
capacity growth in Q2-Q3, though noted it will still be challenged y/y on
incorporating the accruals for the pilot deal. Fuel cost guidance for the year
was revised upwards to $1.03/L (from $1.00/L) and the company noted it
will hedge 50% of Q2 expected usage, which we see as prudent given higher
pricing may be harder to pass on to customers.
Estimates and PT unchanged. We are updating our model for the Q1 results
and updated fuel cost guidance. Our 2024E EBITDA remains at $3.4B (vs.
guide of $3.7B to $4.2B) and our 2025 estimate remains at $3.5B. Our target
price target is unchanged at $18. Reiterate Sector Perform