BNC : Target at 32$ unchangedNote from Tempo1: BNC published its Q2 preview report. Instead of copying the summary of the report which doesn't included new ideas, I chose to extraxt some interesting parts describing the strenght of the AC niche.
Domestic not the most important driver of Air Canada profits. While domestic flights make up the largest percentage of Air Canada’s capacity, they are not the largest driver of passenger revenues for the airline. For the full-year 2019, domestic capacity in terms of seats represented 58.2% of AC’s total capacity compared to 10.9% for international. However, revenues from Atlantic and Pacific flights in 2019 combined for 40.2% of Air Canada’s total passenger revenues compared to 30.4% for domestic flights. In Q3/23, 51.3% of the company’s total capacity is domestic (down from 58.7% in Q3/19) versus 13.7% of capacity being international (up from 11.3% in Q3/19).
Air Canada facing less competition from WestJet in Eastern Canada. Air Canada is facing more competitive capacity on trans-continental routes, but on routes in Eastern Canada, it is benefitting this summer from the pullback by WestJet of a significant amount of capacity from Eastern markets (as well as on international flying). Some of the WestJet capacity is being backfilled by other carriers (Porter, notably), but Air Canada’s relative competitive position in the key Toronto hub is improved versus the pre-pandemic period.
Air Canada has major competitive advantages over the other airlines. The rapidly growing competitor airlines primarily operate point-to-point route networks that are reliant on origin-destination leisure traffic. By contrast, Air Canada operates a large global network supported by codeshare and JV partnerships in international and trans-border networks as well as a large domestic regional network. As such, Air Canada’s domestic flights are supported by traffic connecting to and from its major hubs in Toronto, Montreal and Vancouver. With the exception, to a limited degree, of WestJet’s positioning at its Calgary hub, no other airline can hope to replicate Air Canada’s network advantage. With memberships now above seven million people, Air Canada’s Aeroplan loyalty program is also a massive differentiator that not only ensures that business travelers and frequent flying leisure travelers are unlikely to switch to other airlines, but it also serves as a yield enhancement tool that can help Air Canada offset the cost advantage that the smaller airlines enjoy.
Rapidly growing airlines face constraints on growth. As we have highlighted in prior research, the rapidly growing airlines will likely face constraints on future growth, especially from limited (and increasingly more expensive) capital to invest in their fleets and from challenges related to finding pilots and other skilled labour. There are also capacity constraints at many of Canada’s airports that may limit growth.
Ultimately, we think not all the rapidly growing airlines will survive. The history of the Canadian airline industry would suggest that Canada is not large enough to support more than two large national airlines. We would suggest that ULCCs Flair and Lynx are largely competing for the same customer – budget conscious leisure travelers, who are the consumers most likely to reduce air travel in an economic downturn. WestJet also seems determined to compete in the low fare market, even if it is absorbing its own ULCC subsidiary Swoop into mainline. Porter Airlines offers a higher level of service but faces competitive pressures in the leisure market from the ULCCs and WestJet, and a formidable competitor in Air Canada for business travel and premium leisure. We think market conditions will shake out one or two competitors in the next year or two, especially if the current level of air travel demand wanes. Indeed, the process may already be under way as WestJet’s recent acquisition of Sunwing and the absorption of Sunwing Airlines into WestJet mainline will effectively eliminate a competitor to sun destinations.