DEMAND (CATSA): 2024 demand is holding strong as expected. First 4 weeks of 2024 CATSA traffic volume came at 100.5% of 2019 and 110.5% of 2023. If the operating model of airlines were similar to 2019 then AC should be at 100 in Jan 2024, but the model has changed.
Last year in Q1 2023, AC was at 84% capacity (with 85% load factor) of 2019 where as CATSA number were at 90.4% of 2019. AC did not ramp up unprofitable (or low profit) domestic capacity, leaving it for low cost carriers and WJ to operate in low profit market. Instead, AC continued to expand their international footprint in higher profit market. Asia Pacific market will keep yield averages strong.
In US, Jan 2024 traffic came at 6.6% higher than 2023. In Jan 2024 (and continuing on) AC is focused on catering more profitable international travel. This will keep load factor high and bring more revenue per ASM (Available seat mile), leading to strong yield.
AC will confirm demand trends in 2 weeks. Though we can safely assume near term trends are strong leading to strong Q1(and after) results. CAPACITY: Forecasted capacity increase (~100% of 2019 ) to be well managed. If YTD 2024 increased demand (100.5%-90.4% = 10pp) is proportionately (as per last year) allocated to AC and other airlines, AC capacity/traffic should increase by 10pp and two scenarios are possible:
- @ additional 10 pp capacity increase, resultant load factor will be higher (~86%).
- If load factor stays the same (85%), capacity increase will be 11+%.
In above scenarios one can expect strong (increasing) yields and margins.
I am assuming other players like westjet etc.. ran smooth operations in Jan and did not loose passengers. If not, AC's proportion would be higher from total increase this year leading to higher load factor or higher capacity.
YIELD/REVENUE: Yields will stay strong Demand, so far in 2024 is robust and capacity well managed by AC. In such environment, yields will stay strong (at least same as Q3/Q4 if not better). These numbers are slightly better than my assumptions. Higher capacity doesn’t mean higher yield but higher load factors do. Given AC is more focused on higher yield travel (not lower domestic travel), I am assuming 0.5% increase in yield in Q1 over Q4.
Q1 PERFORMANCE Above analysis means Q1 is going well and we can expect to get stellar results in Q1. Most of the Q1 fuel is already purchased and remaining will be purchased in coming weeks. Advanced tickets sales usually have a peak between 3-6 weeks. Even after adjusting for pilot salary increases, at end of Q1, we can expect
- ~100% increase in EBITDA compared to Q1 2023.
- Stronger Cash Flow from Operations than $1.4B (Q1 2023).
- Net debt ~ $3.5B
- Leverage ratio of ~0.8
2024 performance will be even better than 2023.