From todays Globe and Mail While the rebound in travel stalled with the emergence and spread of the Omicron variant, National Bank Financial analyst Cameron Doerksen sees several reasons to be optimistic about Canadian airlines moving forward.
“CATSA airport screening data shows that in the latest week passenger screenings were at approximately 31 per cent of pre-pandemic levels, down from as high as 56 per cent during the peak holiday period in December,” he said in a research note released Thursday. “As a result of the softer demand, airlines have cut capacity in Q1/22, and we have adjusted our forecasts to reflect lower capacity expectations for our airline coverage names.
“However, there are several encouraging signs for the sector. Firstly, the worst of the current wave of COVID appears to be receding in much of Canada so a return to a more positive backdrop for consumer confidence in travel in the next several months seems possible. Secondly, we believe Canada will soon start to ease some travel restrictions including the elimination of the arrival PCR test. Thus, we believe a rebound in traffic for Canadian airlines can resume in Q2/22, and we still expect a strong summer, albeit not back to pre-pandemic levels.”
Despite that optimism, Mr. Doerksen did warn of a series of emerging headwinds facing the sector, including “much” higher fuel prices and increased competition.
“The current spot price of jet fuel is 94 cents per litre, well above the 74 cents per litre seen in Q3/21 and the 60 cents per litre in early 2021,” he said. “Sustained higher fuel prices will negatively impact Air Canada and Transat, in particular. New competition is also a concern with start-up Lynx Air planning to launch flights in April. Indeed, based on the incremental fleet additions announced by Flair Airlines, Porter, Canada Jetlines, and now Lynx, the potential seat capacity expansion for the Canadian airline industry would approach 30 per cent. Growing competition has the potential to depress prices, and we are already seeing some aggressive fare sales across the industry.”
After updating his financial projections, Mr. Doerksen made a pair of target price adjustments to stocks in his coverage universe. They are:
* Air Canada (AC-T +0.54%increase, “outperform”) to $28 from $30. The average on the Street is $29.63.
“The Omicron wave is a setback to the rebound the company was experiencing through the late summer and into the fall and higher jet fuel prices will increase costs in the near term so we reduced our Q1/22 forecasts accordingly,” he said. “However, we believe the worst of the Omicron impact is now over and we expect Air Canada to see a resumption of the travel rebound in Q2 and into the summer, which may accelerate if travel restrictions ease in Canada and international markets. Air Canada is also scheduled to hold an investor day in late March at which we expect the company to provide post-pandemic targets for margins, cash flows and leverage. Air Canada will report its Q4 results on February 18.”
* Chorus Aviation Inc. (CHR-T, “sector perform”) to $4.30 from $4.85. Average: $5.23.
“For Q1/22, Chorus’s flying levels for Air Canada under the CPA may take a step back from the 75-80 per cent of 2019 levels expected in Q4/21 as Air Canada adjusts its schedule to account for the Omicron impact. However, this will not impact cash flow as Chorus receives a fixed fee per aircraft regardless of flying levels. The resurgent pandemic globally in recent months may also impact some of Chorus’s leasing customers resulting in a slowing of the recovery in lease collection levels in Q1/22 (was at 77 per cent in Q3/21), but we believe the global airline industry will continue to recover over the course of 2022 which should support a return to more normal conditions for lessors.”