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EQUITY RESEARCH
June 22, 2022 Company Update
CAE INC.
Touring The Toronto Training Facility
Our Conclusion
We had the opportunity to tour CAE’s Toronto training center. With us from
the company were Andrew Arnovitz (SVP, Investor Relations and Enterprise
Risk Management) and Simon Azar (VP, Strategy, Marketing, and Digital
Products). We continue to believe that CAE is well-positioned to take
advantage of the structural tailwinds benefitting its Civil segment. We
reiterate our Outperformer rating and $41 price target.
Key Points
Pilot Training Demand A Structural Tailwind: Back in 2020, CAE
conducted a study which had projected that the industry would need
~220,000 new civil aviation pilots and ~45,000 new business jet pilots by the
end of 2029 (please refer to the bar charts in Exhibit 1). The company is in
the process of updating this study and we suspect the demand for pilots will
be even greater given the amount of senior pilot retirements during the
pandemic and the strong business jet recovery. We would also note that the
demand for pilots understates the need for training. Not only do new pilots
need training, senior pilot retirements have a cascading effect on training
needs for airlines. For example, when a senior captain of a widebody aircraft
retires, the co-pilot moves into his/her seat, and pilots throughout the
organization move up a rank, triggering a training event. As well, while
concerns over a recession and rising fuel prices are weighing on airline
equities, CAE’s Civil revenue is not as sensitive to the marginal change in air
passenger traffic. Pilot training is regulated and thus provides CAE with line
of sight to a recurring revenue stream. In the near term, the recovery in the
in-service fleet is what we view as the key indicator of pilot training demand,
which is expected to recover to pre-pandemic levels in the next 12-18
months, according to Oliver Wyman. As such, CAE’s Civil segment offers a
lower-beta way to gain exposure to the recovery in the aviation space.
Outsourcing Pilot Training Is More Efficient: The CAE Toronto training
center houses 19 FFS (full-flight simulators) across 18 different aircraft types
and is a shared location between CAE and AC. This speaks to the symbiotic
relationship between CAE and its customers. AC utilizes CAE for overflow
training and CAE sells excess hours on AC’s FFS to improve utilization and
drive extra revenue. This is just one example of how an airline can benefit
from increased efficiencies by outsourcing its training needs to CAE. We
would note that pilot training is CAE’s core competency, so the company can
generally run training operations with more cost efficiency. We estimate an
airline that outsources its training to CAE realizes ~20% savings. We
anticipate as airlines recover from the pandemic that they will be more open
to outsourcing their training needs as a means to lower their cost structure.
This is evidenced by recent wins announced by CAE, including a 10-year
exclusive commercial aviation training agreement with WestJet, 10-year
exclusive commercial aviation training agreement with Scandinavian Airlines,
and various other agreements or extensions with Envoy Air, Avianca, LOT
Polish Airlines, and Sun Air Jets.