CIBC on the investor's dayIs AC Being Too Optimistic In Its Long-term Outlook?
Our Conclusion
AC’s shares are down ~9% after hosting its Investor Day. In this report we answer the main questions we have received on the back of the company’s long-term outlook. While AC’s FCF outlook post 2027 is below what we had anticipated, it is clear the company does benefit from a number of revenue opportunities that require an investment into its fleet and technology stack. We view its outlook as strategically sound and we believe the company does have flexibility to adjust if the revenue environment changes. In the near term, we continue to have a positive view on the supply/demand situation in the Canadian airline space, which bodes well for yields. Our Outperformer rating and $28 price target are unchanged
Key Points
Is AC Being Too Optimistic In Its Long-term Outlook? The main question we have received is whether AC is being too optimistic in growth plans that are driving its capex outlook. For instance, AC’s Q3/24 MD&A noted that its total projected capex in 2028 would be ~$2.2B versus its most recent update which suggests something in the ~$3B range. The company’s capital investment from 2024-2028 will total $18B, of which 50% will be for new aircraft and 25% will be for technology, aircraft reconfiguration and infrastructure, with the remaining 25% for maintenance and inventory. While this is a significant amount of spend, we would note the following: 1) AC’s fleet has shrunk from 403 in 2019 to 347 at the end of Q3/24, which speaks to the need to reinvest in order to meet current demand. 2) While AC’s expectation for ASM CAGR from 2024 to 2028 is 5%-6%, using 2019 as a baseline it is closer to ~2%. In other words, the capacity growth AC is putting out into the market reflects the continued rebuilding of its network versus market share grab strategy. Using 2019 as the baseline, AC’s growth rate is in line with economic growth. We do not anticipate AC’s capacity to recover to 2019 levels until 2026. For context, Canadian passenger kilometres grew at a 3.9% CAGR from 1982 to 2019. 3) These investments should drive improved revenue quality by expanding AC’s premium offering, increasing its international reach, and supporting its sixth freedom strategy. In other words, we do view AC’s capital plans as being strategically sound. 4) AC does have flexibility in its growth plan, noting it can flex down its capacity growth to 115B ASMs by 2028 versus its baseline target of 130B ASMs. This suggests there is some capex flexibility to adjust to a weaker revenue environment.
Revenue Targets Ahead Of Expectations But Are They Realistic? AC is guiding to $30B of revenue by 2028 and expects to exceed this amount by 2030. For reference, AC is guiding to ~$22B in revenue in 2024 and we were previously forecasting ~$26B in revenue in 2028. AC’s revenue aspirations infer 7%-8% revenue growth per year backstopped by capacity growth 5%- 6% and unit revenue up ~2%. If we disaggregate, there is a solid foundation to achieve these revenue goals. We would view underlying capacity growth to be 2%-3%, so in essence AC is looking to expand this by another couple of points per year.