RE:NBF: New travel restrictions push recovery to the right
But new travel restrictions push out a recovery
We suspect that new travel restrictions, including pre-departure testing and arrival testing plus related hotel quarantine for international travelers will persist beyond Q1 pushing a rebound in demand as well as cash flows for Air Canada to late in the year and into 2022. For the full-year 2021, we now assume AC's capacity is at 26% of 2019 levels versus our prior expectation of 45%. We still expect a modest rebound in demand to begin late in the year, but we now assume AC only flies 40% of 2019 capacity in Q4 versus a prior expectation of 55%. For 2022, we expect a slower ramp-up in capacity early in the year and now assume capacity is at 65% of 2019 levels versus our previous forecast of 75%.
The National Bank analyst now assumes the travel quarantine will remain in place in Canada until much later in the year with only a modest improvement in demand and, as a result, is now projecting much lower revenue and cash flow projections for 2021 and 2022. Is this realistic?
Pent-up demand for air travel clearly exists, but tourism and air travel will only begin to recover to previous levels when the travel quarantine is abolished. So the question is, how long will Canadian quarantine requirements be in place for inbound travellers, and those of other countries?
United States case counts are falling quickly, and many epidemiologists believe this is due not to vaccinations (just yet) but to herd and seasonality effects. Estimates are that herd immunity, assuming 60 percent of population is the correct estimate, will be reached by May. This estimate includes immunity from past infections and vaccinations. (Covid-19 variants may push herd immunity somewhat higher percentage-wise, which would delay herd immunity by a month or so given current vaccination rates.) It’s a similar story for the United Kingdom.
We know Canada’s situation is different, given its lower infection rate and slower start in vaccinations. Using Ontario’s numbers as representative of Canada’s population, as of today, 1043 Ontarians (down 18 percent from the previous week) are hospitalized because of Covid-19, and according to the Public Health Ontario website, of those hospitalized, 808 are above the age of 60, or about 77% of the total hospitalizations.
The number of Canadians above age 60 is about 9 million. Assuming the government is correct in stating that by end-March at least 3 million Canadians will have had at least one shot of the vaccine (and everyone in long-term care facilities will be fully vaccinated), in order to vaccinate the remaining population by September, about 3.5 million Canadians 18 or older will need to be vaccinated monthly (April 1 to Sep 30). Late April is the time last year that case counts across Canada began to decline, largely due to seasonality effects. By end-May then, most Canadians above 60, and others who are at risk, should be vaccinated. Below age 50, the mortality rate for Covid-19 is about the same as it is for seasonal influenza, which puts Covid-19 into the bad flu category. In one study conducted in France, seasonal influenza results in more hospitalizations than covid-19 for individuals between 18 and 50.
I believe these are the primary reasons for the government’s April 30th travel ban to/from southern destinations. By then, case counts will be much lower and Covid-19 hospitalizations no longer a concern. Public Health will have gotten ahead of the curve in terms of vaccinating the most vulnerable, seasonality effects will be in play, and provincial governments will have introduced testing protocols at international airports. There should be no need for inbound international travellers who test negative prior to departure and on arrival in Canada to quarantine. Similar scenarios should be playing out in most other countries.
We should therefore expect a fairly robust H2 2021 in air travel.
Target lowered to $26.00 from $30.00
Our prior forecast was for a $934 million EBITDA loss in 2021, but we now forecast an EBITDA loss of $2.3 billion. The current consensus for 2021 is for positive EBITDA of $939 million, which is wildly optimistic, in our view. For 2022, we now forecast EBITDA of positive $2.2 billion, down from our prior estimate of $2.3 billion. As a result of our lower earnings expectations and higher cash usage, our target moves to $26.00 from $30.00.
Depending on the source, 2021 consensus revenue is about $9 billion and EBITDA in the $900 million range. Consensus EPS is in the $(3.50) to $(4.02) range, depending on the source (Reuters, WSJ)
TD Bank is the principal cardholder for Aeroplan and would have the most accurate insight into 2021 loyalty revenue. TD’s most recent revenue and EBITDA estimates for 2021 are $10.6 billion and $679 million, respectively, with an adjusted EPS of -$4.11. TD is still forecasting a 2022 EBITDA slightly higher than 2019’s.