Impact on AC of unfavorable factorsImpact of unfavourable factors.
Q2 and Q3 are the biggest Qs for Air Canada and in 2023 these will be record Qs. By now, Q2 is behind us with strong ticket prices and low fuel prices. For Q3, most of the flights by now are at advance ticket sales stage. Risk to revenue is minimal. Most of jet fuel till mid Q3 should already be purchased and a large proportion of remaining Q3 fuel should have been purchased.
Factors
1. Jet fuel price: Budget for Q2-Q4 is CAD 1.09/Litre (WTI = $77-78, IATA Jet Fuel price = $100-$105) . But price has been hovering around CAD $0.99-$1.01 per litre for past 3 months. It is approx. 7% lower than forecast for remaining year. For fuel price to make any dent to 2023 EBITDA forecast ($3.5-$4.0B), fuel price have to stay at CAD1.17+ per litre for more than 3 months. Chances of this happening are less than likely, at least not in coming weeks. Even if it happens, it will take time to get there and by then Q2 and Q3 profit will be pocketed. It means leverage ratio of < 1.3, the best in North American industry. Also fuel price is in US$, which is depreciating against CAD$.
2. Demand/Revenue: Given than 2023 capacity is 10% lower (unlike US airlines) than 2019 and prices much higher than 2019, with additional travel enabled population (immigration), any sort of recession will still allow to keep revenue stable or not drop too much. In 2008 recession, demand dropped by about 10-15% and most of that was business travel. Business travel in 2023 is much lower (than 2019) anyways. Missed 10% demand is still pent up and any lowering of prices will keep demand stimulated. China capacity is making a come back but not fast enough to meet demand anytime soon. If recession does hit, it will lower interest rates too.
3. Interest rates: Since a large proportion of debt is in fixed interest, the impact of higher interest rates on debt is not material. With $10b+ cash in hand and additional free cash flow, they should prioritize paying off variable rate debt first. They have plenty of levers at hand. New planes will be purchased with cash (at hand and FCF).
4. Interest cost: With net debt reducing at a fast pace (in 2023) and the opportunity to pay off debt, AC’s effective interest cost (interest cost – interest revenue) will lower quickly.
5. US/CAD FX: CAD is appreciating since end of Q1. FX rate at end of Q1 was 1.355 (assumption for remaining year) and today it is 1.32. This does impact US point of sale revenue negatively. But, favourable (appreciating CAD) FX impacts CPA, Airplane purchase, portion of maintenance, fuel price and net debt (outstanding and payments) positively. If the last 2 months trend continues, it will positively impact all financials net net. This factor doesn’t impact US airlines.
Even if above factors kick in negatively for AC, let’s say in Q4/2023-2024, by then leverage ratio will be close to 1. In 2024, AC will still continue to generate FCF and lower their net debt. This is what AC have been preparing for since 2012. It’s not by chance but a well planned strategy. SP will continue to rise for same multiples.