Air Canada T.AC

National Bank: unchanged at 29$

[lb1temporary]

Costs higher, but maintain Outperform as revenue trends remain positive

Q4 2022 results

Q4 profitability below expectations

Revenue was $4,680 million (up 71% y/y), ahead of both NBF at $4,449 million and consensus at $4,393 million. Capacity was up 59% y/y in Q4 and the load factor came in at 82.8% versus our estimate of 81.0%. Q4 adjusted EBITDA was $389 million versus NBF at $500 million and consensus of $480 million as costs came in higher than forecast. Air Canada ended Q4 with $9.8 billion in unrestricted liquidity (down slightly from $10.2 billion in Q3).

Cost outlook less favourable

The market may be disappointed with Air Canada’s cost outlook, with nonfuel unit costs in 2023 expected to be up 13-15% versus our prior forecast that implied non-fuel unit costs up 9% versus 2019. Air Canada also now expects 2024 adjusted CASM to be up 8-10% versus 2019 versus management’s prior target of up 2-4%.

EBITDA still forecasted to improve significantly

Tempering the higher costs is a revenue environment that remains very favourable with Q4 booking trends strong and continuing into 2023. For 2023, AC is guiding to EBITDA of $2.5-$3.0 billion and is targeting 2024 EBITDA of and $3.5-$4.0 billion, both of which are in line with street expectations (vs. NBF prior estimates of $2.8 billion and $3.8 billion and consensus of $2.9 billion and $3.8 billion). Air Canada expects capacity to reach 90% of 2019 capacity levels in 2023 and returning to 2019 levels in 2024 (previous expectation was for 95%).

Maintain Outperform and $29.00 target

We maintain our Outperform rating and $29.00 target on Air Canada shares. While higher costs will remain a challenge, our positive thesis on the stock is driven by our expectation that air travel demand will remain strong and that Air Canada's profitability and cash flows will progressively improve over the next two years. With the stock trading at just 4.2x 2024 EV/EBITDA, valuation also looks attractive.

[Returns2021]

They have only been wrong 3 straight years.  They completely ignore demand picture in the next 12 months as we enter a severe and prolonged recession.  Demand decline and high costs, burning cash will put the company in major trouble.