Air Canada and Jet Fuel PriceFor any business its important to make more revenue than cost incurred. This is the discipline Air Canada has put in place since 2009/10. ‘Make more cash than fixed and variable cost’, is at the heart of any successful asset heavy businesses. If proportion of the variable cost is higher, an airline can easily manage capacity and be profitable even in mild revenue environment. The cash generated during 2013-2019 had gone in to buy new wide body fleet, besides other investments. That capital investment going forward will be much lower.
Air Canada has lowered their fixed cost proportion over last decade strategically (pension cost, fleet ownership, union contracts, sales contracts, reduce revenue dependency on airline, credit card, vendor cost, etc…). It means they have more flexibility to manage capacity. That is the reason they were able to project lower Q3 cash burn (projected $3-$5M/day) while operating at projected capacity/volume of only 35% (of 2019). Now, it is clear (and will be confirmed in few days) that they are currently using 60-70% of their fleet (@50%+ volume of 2019). This will easily put them in almost cash neutral it not positive.
One factor that has changed since last projection is that fuel price has increased. Jet Fuel cost for airlines is approx. 20% (+/- depending on the fleet performance) of total cost. Comparing the current jet fuel price to 2018/19 time period, last 2-3 weeks are higher than average of 2018/19. Through Q3, for most part the jet fuel cost was lower than that average. Following is the projected impact.
Q3: Jet fuel price impact in Q3, for most part was baked in, as projections were made in July. Airlines purchase Jet Fuel price approx. 6 weeks (could be longer in case of longer lead times) in advance. Hence, Q3 for most part should not be impacted by current fuel prices.
Q4: Tickets prices have been generally higher than same time in 2019. (
https://www.theglobeandmail.com/business/article-canadians-paying-higher-airfares-as-air-travel-recovers-from-pandemic/). This article was written in Oct and probably based on ticket prices in the previous 2-3 weeks. Jet fuel price impact of last 2 weeks of Sept will show up in end of Oct to Nov. And yes, tickets are sold many month in advance and peak sales occur approx. 6 weeks prior to flight.
I expect two things:
1) Ticket prices and/or fuel surcharges continue to rise where/when they can.
2) Slower capacity growth to improve flight loads. And let low cost carriers fly cheaper fares (if they can in higher fuel cost environment: pun intended). Days of cheaper fares, on a average, are gone. Today’s Air Canada is not a charity.
The only time airline will find it difficult to manage fuel price impact is, if the fuel prices increase very rapidly in few days. Since, jet fuel price is procured 6 weeks in advance, they still have some time to respond with ticket prices. If the initial response is partial, they will catch up over few weeks. Air Canada of today is much more agile than before.
What happens to stock price, we will know next week. What will the market response be when AC shows cash flow positive? I suggest start looking at market response in 2017 and 2019.