Q4 results slightly below expectations
Air Canada reported Q4 results this morning that were slightly below NBF and
consensus forecasts while also providing initial guidance for 2024. For more
detail, see our Q4 results Flash (link to AC Q4/23 results Flash).
Costs the focus with 2024 guidance
Air Canada's 2024 EBITDA guidance of $3.7-$4.2 billion is roughly in line with
our prior forecast for just under $3.7 billion and the consensus of $3.8 billion.
The focus with the guidance, however, is that AC expects CASM ex-fuel to
be up 2.5-4.5% y/y versus our (admittedly overly optimistic) prior forecast
for a 2.5% y/y decrease. Management indicates that its cost guide includes
an assumption for higher pilot costs from a new labour agreement which is
currently being negotiated. We also stress that cost increases are industrywide, so AC is not unique in this regard, noting that the large U.S. legacy
airlines have 2024 CASM guidance that is similar to Air Canada's.
Demand still looks solid
Passenger yield in Q4 was up 1.8% y/y, which was much better than the 2.5%
y/y decrease we were forecasting, while passenger unit revenue (RASM) was
up 2.6% y/y and up in all markets (notably strong for Canada at +7.3% and
Pacific up 8.9%) except the Other category, which includes LATAM and sun
destinations in the Caribbean. Management is seeing stable demand, noting
that forward bookings for Southern European destinations are running ahead
of last year while 6th freedom traffic trends are also ahead of 2023, offset by
some yield pressure on sun destination markets.
Maintain Outperform and $31.00 target
We maintain our Outperform rating and $31.00 target on Air Canada shares
as we roll forward the basis for our valuation to 2025. Although the market
remains concerned about how sustainable demand for air travel will be in 2024
as well as higher costs, we continue to argue that current valuation on Air
Canada shares is pricing in a material decline in profitability for 2024 that is
much worse than AC's guidance. Based on our updated 2024 forecast, the stock
trades at just 3.2x EV/EBITDA (historical average of 4.4x) and 6.2x P/E, which
we believe more than fully reflects the market concerns.