AC stock, Fuel price and Credit card revenues AC stock has surprised many and those who have missed the boat still look for first opportunity to say ' look I told you so'.
After all the intelligent posts /information from Airline Investor let's evaluate how fuel can impact the airline industry and Air Canada.
1. IMPACT: Fuel is approx. 23% of AC total expense in first 3Qs of 2019. Not looking into avg fuel price/budget, let's consider 20% increase in fuel price ~$65-$70/bb or without any steps taken by AC to mitigate it, it will translate into max $800M impact to bottomline.
2. Options with AC:
a. Fuel hedging: AC uses hedging flexibly and particilates when necessary. A strong tool if used intelligently. Seems like there was min. hedging activity in Q3 but could be different for Q4 and Q1.
b. Fuel efficient aircraft. 787 are more fuel efficient and as epr AirlineInvestors messages, also more revenue effective because of longer stage length. A220s will improve fuel efficiencies as they replace (or delayed replacement because of 737 delay) older fleet starting now.
c. Fuel surcharge or ticket price: Capacity is contrained as is cause of 737 max delays. If market/economy continues to hold (despite Iran/US woes) there will be enough room to increase the price by let's say $5-$10 per passenger. 50M Passengers will translate that into $250-$500M revenue. Yes, not having 737 growth would facilitate ticket price and at same time as per Airlineinvestors message, Air Transat capacity and new flee can fill the growth void too. I believe still there is opportunity to increase ticket price.
3. Chances of fuel price going above $70/bb and staying there sustainably for long time are very less. There are enough market and political levers which will activate to bring it to balance. If not then, it might test the recession, which has been patiently waiting for a green light ;).
4. If still some investors believe that airlines are dependent on fuel price, they should read airlines investors messages in the sequence they were posted.
5. And special focus on understanding credit card revenues/profits. A perfect tool in airlines kitty to create a profit/revenue stream independent of airline operations. Like OTB said, airline makes the money if I eat ice cream from baskin robin, even in winter ;). It seems there are not many in the market who understand this revenue stream and hence some analysts are jumping to quick conclusions.
Still keeping it simple, using some posts from airlineinvestor and OTB, lets do simple math.
a. For 2020, if there are approx 6M credit card holders (5M in 2019 growing to 7M in 2021),
b. They pay let's say $150 annual fee on an average ($89-$399 per card), it will translate into $900M per year.
c. If I am going to get a credit card with annual fee, for better ROI, I would spend some good money on it, let's say min. $7500 a year (assuming 2% cash back on $7500 to break even $150 annual fee), but I am convinced the number will be much higher. Even if we assume, $20k annual spend, it would mean $120 billion spend on card. Let's use $100b
d. A portion of that (conservatively assume 2.25%, for Amex and Visa cards) will create a revenue stream for AC/Banks/Other players of approx. 2.25B. The Master card, Visa, and Amex charge 1.5%-3.75% to merchants in that sequence order.
e. Given that in last decade negotiation powers have shifted from banks to airlines (Airlineinvestor messages and other industry knowledge) and because the miles (points) have to be redeemed on airline, a major chunk of that revenue will goto airlines. Even if we. very conersvatively, use 50%, it will mean (50% of 2.25b+0.9B), approx. $1.56 billion revenue for airline. As per one of the research quoted by Airlineinvestor net benefit/income is approx 40-45% of total revenue. Let me leave here for you to play with the numbers. Whether its only $15-$20k annual spend per card, or only 2.25% revenue flow, or only 50% of total revenue to be shared by airlines, and or 40% as net income.
How much conversvative do you want to be. My personal analysis is that this revenue stream will create $1B income by 2021 and increase in the years beyond. For Air Canada 2020 and 2021 will be the mature years for this revenue stream.
And with $2.7B cash on hand, how many shares will AC buy back? Imagine the possibility as long term investor, if stock price stays low and then calculate credit card earnings per outstanding share and then decide how much is the airline dependent on fuel price. And AC will produce more cash flow in 2020 and 2021 to be used for buy backs. So you think AC can better manage headwinds yet or not?