Comparing Air Canada with Delta and other US airlinesAir Canada is in very strong stronger financial condition than US airlines. Why?
Fleet renewal - US airlines are in middle of fleet renewal and need to generate lot more cash than Air Canada in coming 3 years to upgrade their fleet. They are in this position because they had delayed their fleet renewal in 2010s in order to give money back to shareholders.
- Air Canada on the other hand bit the bullet during 2010s and spend billions to renew fleet (now has one of the youngest and most fuel efficient fleet). They are on the tail end and have to spend a very limited amount in next 3 years.
Debt, outstanding shares, liquidity and cash flow generation. I have talked about AC’s ability to generate free cash flow (in coming years) in few earlier posts (lower break even, overall recovery during 2022-2024, increased cargo volume and yield, credit card, cash flow generation at even higher oil price...)
| | Revenue 2019 | Total Debt | Liquidity | Adj net debt | Target net debt by 2024/25 | Capex - 3 years | Free cash flow - 3 years | Outstanding shares (MM) |
Pension |
| Air Canada | $19.0 | $ 16.8 | $ 9.6 | $ 7.2 | $2.0 | $3.0 | $7.0* | 357 | Surplus |
| Delta Airlines | $ 47.0 | $ 27.0 | $ 14.2 | $ 20.6 | $15.0 | $15.0 | | 641 | Funded |
| United Airlines | $41.0 | $37.0 | $ 19.7 | $ 25*** | $ 25.0 | $20.0 | | 329 | Deficit |
| American Airlines | $ 46.0 | $42.0 | $15.8 | 24.0** | | $8.0 | | 721 | Deficit |
Source of info: Recent and older financial results of US airlines and Q4 results of Air Canada. Some (free cash flow – 3 years) information will need to be updated from upcoming investors day of airlines. Total debt includes outstanding leases. Assumes debt reduction with cash flow; they could use cash to buy back shares too. *TD banks outlook for next 3 years. My own calculations are higher than this. This number is after the capital spend. **https://seekingalpha.com/article/4480919-american-airlines-aal-stock-last-pause-before-full-recovery *** June 2021 investors day. They plan to reduce this number to $18B by 2026. But have at least $15B+ capex in 2022/23 alone. What does above table means? | | Current Net Debt ratio | Capital commitment | Outstanding shares |
Pension obligations | Target net debt by 2024/25 | Revenue recovery in 2022/23 | Shareholder Value increment over 3 years |
| Air Canada | Lower (38%)* | Very low | Lower | None | Lowest | Less than full | Best |
| Delta Airlines | Medium (44%)* | High | High | None | Lower | Full | Low |
| United Airlines | High (60%)* | High | Lowest | High | High | Less than full | Low |
| American Airlines | Medium (46%)* | Medium | High | High | High | Full | Med |
*Net Debt = Adj net debt/ 2019 Rev Air Canada will produce much better returns compared to US airlines. How? - Capital Spend: With very high debt and high capital spending in coming years, as US airlines recover in 2022, additional cash flow generated will be used to buy new airplanes by US airlines. E.g. United airline capital spend is $20B in 3 years. Thus, limiting their ability to generate free cash flow to shares buyback. Air Canada’s planned capital spend in ~$3.0B in next 3 years, not including the Boeing discount because of 737 issues. American Airline capital spend is lower than others in US but they have other problems.
- Break even point: US airlines have higher break even point compared to Air Canada esp because of high capital spend in coming years leading to much higher debt and higher debt servicing cost. Air Canada has started generating cash flow already at ~35-45% demand (of 2019).
- Loyalty/Credit Card: US airline loyalty and credit card operating model had matured pre pandemic but Air Canada’s will mature in 2022 (with US Chase card).
- Cargo: AC Cargo has ramped up capacity more and quicker than US airlines and intend to strengthen it further. US airlines are lagging behind. There is sustainable shift of ocean cargo demand to air cargo. Using already owned 767 for Cargo operations will improve margins. Cargo currently can almost pass on all the increased fuel cost to price.
- Fuel efficiency: Air Canada has one of the (if not the) youngest and one of the most fuel efficient fleet in the world. If not more, then their fleet is at least 10-15% more fuel efficient (by ASM) leading to better profitability.
- Net debt: Air Canada’s net debt is lowest and with high liquidity, they will reduce debt (and debt servicing cost) in coming years as US airlines will continue to maintain high debt levels to fund their fleet renewal.
- Pension: AC pension plan has been in surplus since many years and many US airlines will need to spend lot more money than regular payments to fund the plan.
- Load factor: AC had become cash flow positive at around 70% load factor. With increasing demand, AC can deal with higher fuel prices by working on improving the load factor (on some of the sectors at least). As LF increases, increasing demand will lead to higher fares. There are two ways to deal with higher fuel prices.
Omicron is plateauing in many countries of the world and continue to subside. The world is getting closer to learning how to live with Covid. Vaccinations are available and are being upgraded. There could be few hiccups along the way, but recovery is underway. Air Canada’s ability to break even at lower capacity and generate cash at lower capacity (than 2019) is the most important aspect. I guess by next year, the baseline will change from 2019 to 2022.
As recovery progresses, Air Canada is much better positioned than US airlines to generate strong free cash flow.