Air Canada T.AC

Fuel price impact on cash flow

[Rouge10]

Let’s evaluate the impact of higher fuel prices:

1. Using Q3 ’21 results as baseline for analysis. Total revenue was $2.1B, fuel cost was $472M (@~$70) and that lead to ~$100M free cash flow at ~35% demand/capacity of 2019. It meant at that low capacity (35%), fixed cost was still a very high by proportion.

2. For Q4, the fuel price was similar (probably 2-3$ higher) at 50% demand/capacity (of 2019). Bear in mind that in addition to Pax capacity/demand, Cargo has more than doubled compared to 2019. Expect a strong cash flow quarter even with fleet purchase.
High level estimates for Q4 at average fuel price of low $70s

                Revenue:             ~2.8B
                Free cash flow:    ~250M
                Fuel cost:             ~630M @ ($72-73)

To understand the impact of fuel price, lets see what would happen in Q1, if fuel price was higher (20-40% higher)

Q1 Scenario 1: Fuel price increase by 20% ($85). Q1 capacity same as Q4 ’21.
If Q1 stays at same capacity/demand, given everything else remains same, and fuel price increases by 20%, we are looking at additional fuel cost of $126M. One can safely assume, more than half of this can be passed on to ticket price (some can be captured in Q1 and remaining in next few months). Air Canada is in business of making money and not gaining market share blindly (which they did pre 2012). In last many years, like any other business, they have consistently altered their routes/capacity/ticket price to improve margin. With that, you can still expect ~190 M ($250-~60M) of free cash flow in Q1. It means all things being equal, 2.5% increase in ticket price.

Q1 Scenario 2: Fuel price increase by 40% ($100). Q1 capacity same as Q4 ’21.
In case, the fuel price increases by 40% (~$100), fuel price increase will be $252M and if we assume half can be passed on to the ticket price, then you can expect the impact of $126M and conservatively, still leading to positive cash flow of ~125M. It means 5% increase in ticket price on average.

As capacity/demand increases (as omicron/covid reduces) in 2^nd half of Q1 and Q2, The total free cash flow rate will increase.

1. Proportion of fixed cost will decrease, leading to higher margins. E.g. fixed interest cost will be distributed over higher revenue leading to better margins.
2. It will be easier to pass almost all of fuel price increase (cargo business only) to cargo pricing, given the cargo market. Passenger market might not be as easy.
3. Air Canada has one of the youngest and most fuel efficient fleet in the world.
4. Q3 load factor was 71%. As market recovers, load factor will improve, reducing the fuel consumed per ASM and improving margins. We can expect this in March and beyond (Q2, Q3).

There are enough forces in the world to counter balance the high oil prices. This game of high/low oil price will continue for some time.  It’s a matter of increasing supply on their own or under some world politico-economic pressures. Remember 2008 when oil price temporarily spiked to $140+ but came down. AC suffered losses because of incorrect hedges (in addition to other problems like pension, higher breakeven, etc..) and not because of only higher fuel price. Those days are long gone.

Air Canada will still remain substantially profitable even at $100 oil price. Key here is post covid recovery. It will not be a straight line recovery. But overall trend line will be positive in 2022. With PCR test gone, positive trend will be confirmed soon. As demand increases, price yield can be pushed higher capturing most of the fuel price impact. Cash flow will stay healthy. 

And yes, negative EPS doesn’t matter, it’s the positive cash flow that matters. EPS will stay negative because of high amortization rates for few years as Air Canada had invested billions in recent years, unlike US airlines.

[Returns2021]

This is what we call WISHFUL thinking. Massive impact on AC business.  It will be years before it has a chance of managing debt assuming it does not go bankrupt along the way.  The damage done by C19 is unlike anything else experienced by airliners.....  

[OnTheBalance]

This post has been removed in accordance with Community Policy

[Returns2021]

You will get creamed on Friday.  The company will not recover for years to come.

[TradeForex]

The only thing getting creamed today is Libtard Retard2021's butthole from a thrusting AC