NBF: Q3 PreviewQ3 preview - pilot vote the key short-term catalyst
Expecting some earnings noise in Q3
Some Q3/Q4 earnings noise expected There will be some strike threat-related noise in the Q3 and Q4 results for Air Canada. For one, given the uncertainty for passengers, Air Canada undoubtedly saw some book-away in the weeks ahead of the potential work stoppage as well as some costs related to re-booking. There may also be some pilot cost accrual catch-ups and retroactive cash payments in Q3/Q4 that will impact Air Canada's overall results. We have trimmed our Q3 and full-year forecasts to reflect our best guess at the earnings impact.
Pilot deal removes an overhang
Air Canada has reached a tentative agreement with its pilots on a 4-year deal that will see average wage increases of ~42% over the life of the contract. The deal still needs to be ratified by the pilot group and there remains a risk that the contract is not affirmed. We expect vote finalization in the coming weeks. If the deal is ratified, we believe a significant overhang will be removed for the stock.
Industry capacity growth decelerating
Industry capacity growth is decelerating which could help drive some yield improvement for Air Canada in Q4 and 2025. Indeed, the 1.4% y/y increase in Q4 U.S. transborder capacity is much lower than the 10%+ y/y increases seen from Q1 to Q3. International capacity growth has also progressively slowed from being up 18.1% y/y in Q1 to the 0.6% y/y increase in Q4. Domestic capacity has been much more constrained this year and although the Q4 y/ y increase is slightly higher than the prior quarters of the year, it is still well below 2019 levels.
Maintain OP; target trimmed to $22.00 from $24.00
While there is still some risk that the recently reached tentative agreement with its pilots is not ratified, we believe the confirmation of a new deal would remove a key overhang on the stock. In addition, while yields have softened over the summer, especially on international routes, we are encouraged to see capacity growth decelerate in Q4/24. Finally, the easing of jet fuel prices in Q3 provides material cost relief for Air Canada in the quarter and potentially for the remainder of the year.