RBC : AC Investor conference May 17
Highlights from the RBC Canadian Industrials Conference
Sentiment: Neutral
This morning, John Di Bert, Executive Vice President and Chief Financial Officer, and Valerie Durand, Head of IR and Corporate Sustainability, presented during day three of RBC's Canadian Industrials Conference.
Growth opportunities
2023 turnaround sets the stage. Management began the discussion by outlining a successful turnaround in 2023, achieving a debt-to-EBITDA ratio below 1x and restoring capacity, all while generating solid cash flow. This has positioned the company well from a balance sheet perspective, and management believes it can grow at a clip higher than GDP due to strong demographic tailwinds and capacity expansions. Looking ahead, the company would like to be a consistent FCF generator and noted the road is lumpy, with 2026 being a significant fleet capex year, a function of OEM deliveries being pushed out. In addition, the company pointed to leasing more planes vs owning, which could lead to higher FCF generation.
Sixth freedom.
The company spoke to its sixth freedom growth plan, aiming to capture international traffic from US travellers through its strategic hubs and reverse. According to management, the strategy has been years in the making, supported by the build-out of a robust transborder operation that needs synchronized scheduling for international flights. Key is AC's hubs' geographic location provides some of the fastest travel times and gives it a competitive advantage over peers. AC has made significant progress in these initiatives and is well-situated for future growth, in our view.
Business travel.
Management noted that business travel has recovered around 60-70% from pre-pandemic levels, but its definition is blurry due to the rise of blended leisure-business travel. While it was noted that "green shoots" are appearing in the US market, AC anticipates a steady, albeit gradual, recovery over the medium term. Key is that premium cabin revenue continues to grow, which offsets lower business travel levels.
Operations
Yields normalizing. Management indicated last year's exceptional results were driven mainly by the post-lockdown rebound and that we should expect a favourable yet more normalized yield environment in the future. That said, the company noted yields have remained stable system-wide.
Costs pressured in the near term. We asked the company about the higher cost environment, and they noted that the 2.5% - 4.5% CASM-Ex guide includes accrual for the pilot deal, infrastructure/hub improvements, and higher headcount. Management noted that while these factors will pressure costs in the near term, they plan to address this with efficiency gains from increased scale, investments in technology, and fleet modernization over the next few years. In addition, the company noted a 13% improvement in on-time performance in Q1, which is a move in the right direction and should translate into efficiency gains with continued progress, in our view.
Competitive landscape
Breadth an advantage. Regarding competition, other Canadian carriers like WestJet, Porter, and Transat are pursuing distinct strategies. Management emphasized AC's competitive advantage stems from the breadth of its network and services, which competitors cannot easily compete with. AC focuses on delivering the best offering and value through AC's premium cabins, partnership agreements, discounted fare offerings via Rouge, and loyalty program Aeroplan. Key is that historically, the Canadian market has not been able to support more than two domestic carriers due to its low population density and currently has six domestic carriers.