CIBC: Brighter Skies Ahead: Brighter Skies Ahead
Our Conclusion
AC reported Q2 results and provided a constructive outlook that reinforced our view the company is on the path to a sustainable recovery. We continue to view AC as one of our preferred names to gain exposure to the recovery in aviation. We maintain our Outperformer rating and $33 price target.
Key Points
Q2 results reinforced our view that the company is poised for a sustainable recovery. Q2 net cash burn came in at $8MM/day, better than the previous guidance of $13MM - $15MM/day, reflecting recent announcements of removing travel restrictions and the improving demand environment.
Constructive Outlook: We have been optimistic about the recovery of air travel looking over the next 6 - 12 months, and this was echoed by AC. The company saw a significant increase in bookings in June when quarantine requirements were removed, and it expects domestic capacity in August to be down ~33% compared to 2019. AC also noted that future bookings for some winter sun travel were even ahead compared to the same period in 2019. Looking at Canadian air traffic, the seven-day average of air passengers screened through Canada’s largest 15 airports came in at 54,000 on July 18, which is up an impressive 247% from 15,552 on June 1. Given the positive booking trends and good cost control, AC expects that Q3 net cash burn will be $3MM - $5MM/day. This includes $2MM/day in capex, net of financing, and $4MM/day in lease and debt services, which implies positive cash from operations. This puts AC on track to hitting cash-burn neutral entering 2022.
Cargo Still A Bright Spot: Cargo revenue for Q2 came was $358MM, up 33% Y/Y, and remains a bright spot for the company. AC plans on adding two Boeing 767 dedicated freighters that will enter into service in fall 2021 with the goal of expanding to eight aircraft in the next couple of years. Cargo business remains a tailwind for the next few years given the acceleration of e-commerce growth in Canada and strong margins. As a frame of reference, e-commerce penetration in Canada is estimated to be ~14% but much higher in the U.S and Europe (22% and 21%, respectively), which suggests plenty of room for catching up. As well, air cargo rates remain elevated. Looking at the Baltic Air Freight Index, Hong Kong to North America air freight rate was US$7.89/kg versus sub-US$4/kg pre-pandemic. Frankfurt to North America rates were US$4.07/kg in June versus sub-$2/kg in H2/19