CIBC: Weekly reportCanadian Airlines Still Benefitting From Supply/Demand Imbalance -- Transportation & Aerospace Weekly
Key Points
Over the past few months, and as we have made it through Q3/23 earnings season for the North American airlines, we recognize the growing concerns on AC’s equity over the impact of normalizing air travel demand trends postpandemic and a weakening Canadian consumer. On the former, the U.S. domestically-oriented carriers noted that off-peak season demand was softer than expected and they would be adjusting their capacity accordingly. Conversely, AC noted it continues to see strong demand trends, which was also echoed by TRZ back in mid-September when it reported FQ3 results. The question we often get asked is whether the Canadian airlines are being disingenuous with their outlook given the macro concerns.
We are not suggesting AC is immune to a potential economic slowdown given air travel is generally a discretionary spend item for most consumers, but we would note that the Canadian airline cycle is in a different position today than is typically the case when the economy softens. The key difference is that Canadian airline capacity continues to track below prepandemic levels despite healthy demand levels. For instance, using flight activity as a proxy for airline capacity, Canadian commercial flight activity is 84% recovered to 2019 levels versus over 100% when looking at U.S. commercial flight activity. Looking at air passenger traffic though, both the U.S. and Canada are back to, or above, 2019 levels. This highlights that there remains a structural supply/demand imbalance in Canada using 2019 as baseline. Based on Canada’s current GDP, though, it would suggest demand should actually be ~5% higher than 2019 if we assume a prepandemic trend line, whereas underlying capacity is 5%-10% below prepandemic levels. This imbalance was reflected in AC’s Q3 load factor which came in at ~90% versus mid-80% pre-pandemic.
During previous recessions, the Canadian airline industry has typically entered the downturn with a more balanced supply/demand situation. That is not the case today, which provides the industry with some buffer if underlying demand trends do start to soften over the near to medium term