Let’s tackle biggest airline costs first. Biggest costs are fuel, labor and maintenance. Removed depreciation from the calculation.
- For Q2 ‘19, sum of fuel, labor and mtce cost was approx. 53% of (total minus depreciation).
- For Q1 ‘22, sum of fuel, labor and mtce cost (used average instead because it was a very low number) was approx. 59% of (total minus depreciation).
Fuel cost Q2’19, fuel cost was $991M or 1.4B litres (@~$0.65 per litre) @100% capacity of Q2’19. Q2’22 will be @ 75% capacity of Q2’19 and it means fuel consumed will be max (1.4B *75%) 1.05B litres. (Understand difference between ASM and planes/flights).
I am saying max because today’s fleet is more fuel efficient than 2019. To stay conservative, I am not going to use the fuel efficiency benefit but one can safely gain 5-10% efficiency. Fuel guzzlers (Embraer, 319, 320, 767) have been mostly replaced by fuel efficient (737, A220, 330s) planes. Fuel price forecast by most US airlines for Q2 (and possibly Q3) is USD ~3.7 per gallon.
This translates into CAD $1.23 per liter and at 75% capacity of Q2, straight line calc, forecasted fuel cost for Q2 will be around $1.4B. Adding fuel efficiency could improve this number to ~$1.3B. Labor Cost Q2 ’19 labor cost was $781M and Q1 ’22 labor cost was $707M. AC was preparing for stronger Q1 and hired for 75% capacity in Q1, but didn’t happen because of COVID. Assuming at least same cost as Q1 ($707M), labor cost in Q2 will be around 91% of Q2 ’19 @ 75% capacity of 2019. And there is no shortage of staff for AC as they are higher in value chain compared to WestJet or other Canadian airlines.
Maintenance and other costs: Most of these costs (maintenance, navigation, airport, catering, etc..) are for most part variable costs. Over the years, AC has converted these from mostly fixed cost to variable cost. Applying 75% to the 2019 numbers will give us approx. cost.
Total operating cost: $4,0B. Assuming non operating expenses (forex, interest income and expense and others) to be similar to Q1 ’22. $264M. Revenue will be even stronger than cost impact. AC is planning to deploy 75% (of Q2’19) capacity in Q2 and has 14% lesser planes (Mainline + Rouge) than 2019 and with fleet optimization (getting rid of 767s and replacing smaller narrow body with bigger narrow bodies) has kept the total number of seats the same for mainline.
With following assumptions:
- Capacity of 75% translates into proportionate revenue, in given high demand market. Junepassenger flying is at 79% so far in Canada ( https://www.catsa-acsta.gc.ca/en/screened-passenger-data)
- Load factor will be 5% lesser than 2019 because April was a ramp up month. Most of the summer ticket were purchased after Feb 16th, opening up air travel in high fuel cost environment.
- Ticket price is 18% higher than Q2 2019. Various articles on this topic already in news.
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https://www.cbc.ca/news/business/travel-gas-airfare-1.6461093)
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https://financialpost.com/transportation/airlines/summer-travel-costs-are-soaring-and-canadians-appear-happy-to-pay-the-price)
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https://ca.finance.yahoo.com/news/may-inflation-data-june-10-2022-212834308.html)
Pax revenue in Q2 ’19 was $4,338M. Pax revenue in Q2’22 will be around $3,817M (4,338 * (100*(75% – 5%+18%)) (Current capacity – load factor impact + higher fares)
Cargo revenue in Q2 ’19 was $177M. Cargo revenue in Q2 ’22 estimated to same as Q1 ($398M).
‘Other category’ at 85% of Q2’10.
Total revenue will be around $4,4B (@ 91% of Q2’19). I would assume EPS of 0 (though there is a very strong chance of it being positive, much earlier than forecasted), but free cash flow should be close to $400 positive. This cash flow could be used to purchase new 737s without needing any additional debt. Q3 will be even better with revenues almost same (most likely surpass) as Q3 ’19 with 14% less planes. Almost half of the oil for Q3 is already purchased. Ticket prices are still rising.
75% of their debt is locked in at ~4% interest rate for most part of this decade. No need to take additional debt, esp. with ~10b of cash sitting around and not much impact of higher interest rates on debt servicing.
Yes, they acquired additional debt and more shares were issued. Throughout 2010s AC had prepared for such an event and survived 90% demand destruction without much govt. aid (aid that was forced upon AC to revive regional routes). Higher oil prices won’t last forever. But higher fares will last as airlines are going to keep capacity in control. Lower value LCC will have some (minimal) impact on Air Canada market base. Throughout 2020 and 2021 many kept praying for bankruptcy. But, were proved wrong even at 90% demand destruction. Proof is in the pudding. Few more weeks and we will see the results. Airline is on its way generate billions of cash flow in coming years. Post 2011, North American airlines changed from focusing on market share to ROIC.