RE:RBC : AC Investor conference May 17Thanks for the summary. Covers most points but misses few points from B of A investors call. RBC is the only analyst taking a negative view of the same information and this is no surprise. More informed analysts (US based) are taking a rational view of the stock.
Key points are:
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. Like I have mentioned before, AC is geared to produce consistent FCF in coming years and that number should be approx. 8-9% (~$2.0B+) of total revenue. 2026 high capex number is manageable due to following factors.
- AC owns 80% of their fleet and this is a very strong position to be in. For North American airlines this number ranges from (~25% : American to ~83%: United airlines. Remaining % is leased. United is in middle of a large fleet renewal program and their ownership %age will dilute down. Pre-covid AC had stated few times that their optimal %age of fleet ownership is between 70-80%. This provides enough buffer for AC to acquire aircraft without incurring additional debt and still have spare capital for investors.
- AC has stated that they will be making advance payments in 2024 (low capex year keeping in mind planned acft) and these are most likely for 2026 capex in order to streamline capex and FCF; something which institutional investors want to see.
- OEMs are having tough time meeting their delivery dates and in all likelihood 2025-2027 delivery schedule will be altered.
High capex risk is manageable easily and will allow for consistent FCF
AC has made significant progress in these initiatives and is well-situated for future growth, in our view……… Key is that premium cabin revenue continues to grow, which offsets lower business travel levels…….. That said, the company noted yields have remained stable system-wide…….. Demand in medium term is still strong. Advance tickets sales are strong. As of now, no sign of yields lowering in coming summer. Keep in mind, we are still not at 100% demand/capacity of 2019. And in 2024, AC has more diverse international footprint, which will hedge any demand risk in Canada.
Domestic demand is still holding strong. Premium cabin revenue continues to grow. Aeroplan, 6
th freedom traffic, business travel are some of the strong tools amongst others available to AC.
This essentially has made the 2024 guidance fool proof and will be a repeat of 2023. He mentioned to expect a strong FCF in 2024 like in 2023. He was very confident of this lately compared to Feb. FCF 2023 was $2.7B. Conservatively, I am assuming avg $2.0B FCF/year for next 3 years.
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. Pilots deal cost in already in the plan. High cost in medium term will be addressed by optimization. E.g. during high growth period, you always have spare resources and during stabilization, optimization brings cost reduction. Above mentioned high costs are already included in 2024 guidance and years after. We are in May. Airline has very good view of summer already. At worst, pilot strike can do is to bring EBITDA towards the lower end of the guidance and better case scenario points to surpass the high end target. Even with strike, expect ~ 2.0B FCF in 2024.
Keep in mind that AC is not at 100% demand/capacity of 2019, the year when their 737 fleet was parked due to issues. And After that, during 2021-2023 years, Canada has added 1.5M population. The following chart should give you an idea of additional population growth already happening in 2024. 2024 might even surpass 2023.
https://www.nbc.ca/content/dam/bnc/taux-analyses/analyse-eco/hot-charts/hot-charts-240515.pdf Conclusion: AC is on track to produce strong FCF year after year including peak capex years. If FCF is not returned to investors, leverage ratio will soon be negative. CFO has stated many times (in last 3 months) that capital will be returned to investors. They have achieved their key KPIs to do so. My guess is they are waiting for pilots deal to be over and soon after we will see share buy backs. AC stock is bound to grow back to pre-covid price. We saw this in 2018-2019 when some analysts were negative and after train left the station, they kept trying to catch up.