Air Canada had stellar Q1 and Q2 is shaping out to be a record EBITDA. If fuel trend persists, Q3 will produce a record EBITDA too. How!
Demand/Revenue: It’s no secret by now, that demand for Air Canada product is very strong. Few pointers:
- Canada air passenger data shows last week as 103% of similar week in 2019. Doesn't mean all weeks will be same.
https://www.catsa-acsta.gc.ca/en/screened-passenger-data - Canada – China market is opening up. There is huge pent up demand in China for international travel as people haven’t travelled for last 3 years. Pre covid, there were 9-10 daily AC flights between Canada-China. Today, AC doesn’t have that much spare capacity, right away. It means higher fares as flights come back. Yes, Chinese carriers benefit with shorter flights (Russian air space) but AC will capture Canada origin demand due to Aeroplan.
- Any weakness (if there would be any) due to potential recession will allow AC to redeploy capacity to China market.
- AC is not going after All demand (AC Q2 capacity of ~91% Vs total canadian travel/demand close to 95%+ of 2019). AC is leaving low yield/fare demand for LCC and is focused on premium demand.
2.Advance ticket sales (esp international) is much higher than any of the previous years.
- Most of the international fares are much higher than 2019 numbers. Base economy fares 6-10 weeks outs
- Canada – India: > $3,000 (2019 was close to $1600)
- Canada – China: > $6,000. This is crazy. There are very few direct flights recently introduced. Indirect flights are as expensive too. (2019 was close to $1,500)
- Canada – Aus: > $2,200 (2019 was $1,500).
- Canada – Europe: varies but it’s more than $1,200 for most part. Lot of fares are in $1,800 range. This use to be $800-$1,200.
- Strong preference for premium economy product: Not only economy fares are super high, premium economy product growth is surpassing previous levels.
- Aeroplan: 2024 membership (7 million) target is already achieved. As per CEO, ‘other’ category revenue is going to be consistently higher (as in Q1) because of improved aeroplan revenue. Example: TD Visa Aeroplan premium card charges $600 annual fee. For let’s say 1 million such members, the fees is $600M per annum which is distributed between bank, visa and AC, AC being major shareholder.
- Cargo: As more freighters join the fleet, expect cargo revenue to improve consistently.
- Total Revenue: 2023 will be a record revenue year. My estimates are close to $22.0B. Fuel surcharges are not going away. Fares are now pure demand supply play. With demand surpassing supply, prices will stay elevated. Aeroplan/Credit card programs are generating sustainable cash flow.
Capacity: AC’s capacity in Q2 is around to be @90-91%. (annual capacity @90%, Q1 @84% will translate into Q2-Q4 capacity of 90-95%). This means
- AC will run with higher capacity utilization (load factor) as demand is higher than capacity.
- There is not much spare capacity left. AC reduced number of aircraft capacity when COVID hit.
- Any additional capacity (few new planes in coming months and years) will be carefully planned.
Cost: Fuel: Jet fuel price for Q2 is 21% lower than Q1 average. Most of the fuel for Q2 is already purchased (average 6 weeks in advance) and probably 20%-25% of Q3 is purchased too. OPEC is thinking of capacity cut on next meeting on Jun 4
th. By then, expect 25-30% of Q3 fuel already purchased. As per Amos , on 11
th May, average jet fuel price was CND1.01 per litre, where as the budget for Q2-Q4 is at $1.09. Since then jet fuel price is hovering around $1 per litre. If fuel price stays the same (or lower….let’s say due to some sort of mild recession), AC will perform better than their EBITDA and Cash flow guidance for 2023.
Labor: The 2
nd biggest cost will go up but prorated to higher capacity in Q2 and then Q3. Q4 cost could be bit more higher due to pilots contracts. But not overly concerned about pilots. Pilots labor cost even will be manageable even if use WestJet’s salary increase as a benchmark.
Conclusion Air Canada is back. 2023 will be a record revenue and EBITDA year, even with some sort of recession in Q4. By data, we are already in freight/product recession with transportation industry reeling in low volume and consumer product companies facing lower demand. Travel industry is attracting all that spending. 2024 could be normalization year but by then AC will be back to 100% (of 2019) with better business model, allowing it for better results.
As long as fuel price stays stable, expect $4B EBITDA this year. Leverage ratio of <1.25 and net debt of <$5.0B. This will be best leverage ratio in industry, definitely in North America and possible amongst the top globally. No share buy backs (confirmed by management) this year and all the cash be used for deleveraging and buying new planes with cash.
Only few weeks left for Q2 to finish. Q2 results will set the tone for Air Canada. It will be best Q2 on record with only ~90% capacity of 2019. And Q3 will follow the same course .