2023 marked the year for Air Canada getting back to pre-covid and even better/record financial performance. Q4 is over and based on latest information, it will be another record Q4 with higher (than Q3) fuel cost. We can expect following results for 2023.
Revenue: $22B
EBITDA: $4.2B
Cash flow from ops: $4.3B
Free cash flow: $2.7B ($7.5/share)
EPS: ~$6.0 (Q4: ~$1.0)
Leverage ratio: 1.1
All above @ approx. 90% of 2019 capacity. AC has yet to go back to 2019 capacity/demand but 2023 revenue, EBITDA, cash flow and margins have already surpassed 2019 numbers.
Demand, Capacity and capability to profit in 2024 AC, is continuously evolving and differentiating itself from US airlines. US airlines are already at 2019 capacity and have higher proportion (than AC) of low yield domestic travel. AC on other hand is further enhancing its international foot-print. One could argue that at some point, even international traffic yield could be impacted. The argument could have been valid if Air Canada’s share in international travel was optimal. It is still far from fair market share.
Air Canada started targeting international travel in early 2010s as part of 6
th freedom and direct flights strategy using 787. Covid had interrupted, more like delayed, the evolution. Year 2024 will continue the evolution focusing on pacific and new markets. International focus gives AC higher flexibility (targeting higher yield markets) than domestic markets by responding to demand changes using optimal fleet deployment.
There is speculation on Canada’s air traffic volume in recession. Historically, in recessions, air traffic demand/revenue could lower by 10%-15%. Most (not all) economists are predicting soft landing. Following points are important to consider this time.
- Since 2019, Canadian population has increased by 6%. Most of this increase is from immigration (temp and permanent) and they use air travel. We can expect more in 2024.
- Air Canada 2023 capacity was approx. @ 90% of 2019. If strong recession does hits, 2023 demand could be new baseline as worse case scenario. So far, we are not seeing any traffic volume reduction. First 2 weeks of 2024 came at 104.5% of 2019. There are no indications of any demand reduction.
- Delta and United airlines have clearly stated that it will take years for them to catch up to long term trend of air travel as %age of GDP. Covid has created a gap and due to lack of aircraft capacity, it will take time to catch up.
- Air Canada yield won’t be much impacted by lower domestic yield (in Canada) as Air Canada new model is increasing international travel proportionately. Though, smaller airlines in Canada could be impacted.
- If there are changes in demand, Air Canada have flexible capacity (different size aircrafts), which can be promptly redeployed to new demand levels and patterns.
- New Air Canada model has diversified its revenue model and is less impacted by recession. E.g. loyalty model and increasing credit card revenue/profit will allow Air Canada to compensate for any demand destruction, allowing it to maintain yield and margins.
One can expect following in 2024 @ capacity of ~100% of 2019 and yields similar to 2023. Revenue: $24B
EBITDA: $4.6B
Cash flow from ops: $4.7B
Free cash flow: >$2.0B, $5.6/share
EPS: $7.0-$8.5
Net debt: $3.0B ($3.6B by end of Q1 ‘24)
Leverage Ratio: 0.65 (0.8 by end of Q1 ‘24)
Stock price scenarios: (
https://stockhouse.com/companies/bullboard?symbol=t.ac&postid=35773846)
Refer to above post, which explains different valuation possibilities. @ current sp of $18, EV/EBITDA ratio is at 3.1, much lower than analysts target of 4.5, pre-covid levels or US airline ratio levels. Let’s assume the current EV/EBITDA ratio levels for next few months. At this level, with Q4 results, sp should move towards $24 (LR ~1.1) and at end of Q1 results, it should move towards $31 (LR ~0.8). If multiple increases, sp will be even higher.
In case sp doesn’t move, EV/EBITDA ratio will dilute toward 2.0. At that ratio, the opportunity size will increase even further with minimal risk. And with investor grade rating on the horizon, expect daily volume to increase by institutional investors.