CIBC: Investor Day Preview
Investor Day Preview: Laying Out The Path To Normalcy
Our Conclusion
AC is hosting its Investor Day on March 30, where we expect the company to provide more details on its strategy coming out of the pandemic. At a high level we expect AC to lay out its path back to normalcy, especially with increased confidence that we are in the midst of a sustained recovery in Canadian air travel. AC’s last investor day was in 2019 where it laid out several financial targets including adj. EBITDA margin of 19%-22% and cumulative free cash flow (FCF) of $4B-$4.5B. We expect AC to reiterate its commitment to hitting these targets at its upcoming investor day.
Key Points
Path To Pre-pandemic Revenue: Back in 2019, AC generated $19.1B in revenue and we expect the company to provide details on when it plans to return to these levels. We are forecasting capacity returning to 2019 levels during 2023, with revenue fully recovered by 2024. The main pushback we get on AC’s ability to fully recover on the top line are around business travel. We know this will lag the broader recovery, but we expect AC to lay out several levers it can pull to help offset this, including: 1) growth in Air Canada Cargo; 2) expanding Aeroplan; 3) sixth freedom traffic opportunities; and 4) investing in its leisure product offering.
Getting Back To 19%-22% EBITDA Margins: In 2019, AC’s adj. EBITDA margin was 19% and it was targeting a range of 19%-22% from 2019 to 2021. The question is whether the lag in the corporate travel recovery will structurally impair AC’s margins? We do not believe that will be the case and expect the company to lay out levers it can pull or changes in demand trends that will help get margins back to what AC previously targeted. We expect AC to provide an update on: 1) the recovery in business traffic with a recognition that not all corporate travel has been impaired; 2) opportunities around yield management to drive more leisure premium and ancillary revenue; 3) growing Aeroplan, which is a higher margin business; and 4) its cost-cutting initiatives. FCF Priorities –
Deleveraging The Balance Sheet: During the pandemic, AC shored up its liquidity by issuing debt and equity. The company is already taking steps to address its balance sheet having exited the government support program. At its upcoming investor day, we expect AC will discuss its cumulative FCF expectations with the priority towards lowering debt levels. We expect AC will target ~$4.5B-$5.5B of cumulative FCF from 2022 to 2025 (we are forecasting $5.4B). AC has noted that it needs ~$2.4B of minimum cash balance for business operations. Given its current liquidity position and our expected FCF generation over the next four years, we see AC in a position to lower its gross debt by at least ~$8B+ over this time frame.