RE:RE:AC and US airlines’ FCF YieldMy take on the company’s capex that caught the market by surprise. The CFO on recent earnings calls and during investor presentations at various financial institutions reinforced the airline’s intention to generate consistent free cash flow going forward. I seem to recall the CFO also mentioned at one event that future capex spend as a percentage of revenue would be in the area of 12 percent of revenue, and although he didn’t indicate a percentage revenue target for free cash flow, my estimates puts a reasonable target in the 8% to 10% range. He also indicated that 2024 free cash flow would be somewhat less than 2023’s which was $ 2.756 billion. My estimate for 2024 is in the $2 billion range.
Here is my thinking on 2026 capex, the heaviest year in projected capex. I am referencing the May 15 Bank of America presentation and latest MD&A.
The aircraft planned for delivery in 2024 and 2025 does not add up to the committed capex listed in the MD&A for these years. You may recall that the CFO also mentioned on a recent earnings call that aircraft pre-payments are part of this year’s capex. Knowing that Boeing is in a cash crunch my assumption is that in negotiating for the B787-10s, the airline received a higher purchase discount if pre-payments were part of the arrangement. My assumption is pre-payments will be made both this year and next year.
Another factor to consider is the two B777 freighters, previously announced, that were converted into B787-10s as part of this purchase arrangement. The eighteen 787-10s with their increased cargo carrying capacity weakened the financial case for the freighters, as mentioned on an earnings call. It is also possible that these two aircraft were part of the compensation package that was reached between Air Canada and Boeing as a result of the B737 Max grounding. In arriving at compensation with its various customers, Boeing offered higher discounts on larger aircraft and with farther out delivery times. The two B777 freighters, roughly equivalent to two passenger configured B787-10s in terms of price , could be highly discounted or come at no cost to Air Canada.
Another factor to consider involves the Airbus A321XLR. The original purchase announcement for these aircraft indicated that the first fifteen to be delivered are leased aircraft. Three are to be delivered in 2025 and the remaining 27 between 2026 and 2029.
From the presentation, of the committed aircraft capex in these three years (2026 to 2029), about 70 percent of the spend occurs in 2026. This suggests that perhaps twelve to fourteen B787-10s will arrive in 2026 along with the remaining 12 leased A321 XLRs, and possibly three to five XLRs that are to be purchased, and a number of Airbus A220s, assume 10 (17 to be delivered between 2026 and 2029).
The purchase price for the A220s is about $50 million, and assumed purchase price for the XLR at about $100 million (likely lower) and the price for the 787-10s at about $230 million (likely lower). This puts total 2026 committed capex in the ballpark of the $4.6 billion mentioned above.
However, given the 2024 and 2025 pre-payments, the possible ‘free’ or heavily discounted 2.5 B787-10s, the twelve leased XLRs, it is likely that actual 2026 capex may be similar to 2025’s committed capex of $2.4 billion.
The other piece mentioned on an earnings call is that the company has not yet decided how many B787-10s will be growth aircraft, and how many will replace existing older aircraft. It is possible that some of these aircraft could replace some or all of the six B777-200LRs, two of which are leased, or several older Airbus A330 aircraft, ten of which are leased. The departure of some leased aircraft would favourably impact depreciation and net debt.
So in my analysis, investor fears around high capex over the next few years, particularly in 2026, is overblown, and in fact will likely be more evenly distributed for the reasons mentioned above, which will result in a consistent and growing future free cash flow in coming years.
Cheers, Factoman