Overall Q1 results are good and are in line with very strong future. If there was no sand bagging (very apparent), results would have surpassed analyst targets. Let’s evaluate some of the key aspects.
Q1 Capital Spend AC bought/leased 5 new aircrafts and spent $536M on additions to property, equipment and other tangible assets. Let’s assume most of this went towards 5 new aircraft, though a smaller portion would have gone towards other spending including advance payment for 2025/26 capital spend. Looks like 5 out of 10 (earlier planned new acft) were purchased/leased in Q1. Remaining 5, worth $365M will be bought/leased in next 3 Qs. If 737Max are leased later in 2024, they most likely will be advancing the 2025 orders.
Read below my post re: capital spend. Numbers are in ballpark.
https://stockhouse.com/companies/bullboard?symbol=t.ac&postid=35946378 There is enough evidence that capital spending will be balanced/distributed over next 3 years and still generate ~$2B annual FCF for year 2024-2026.
Q1 Net debt, FCF and LR As expected, net debt reduced to ~$3.7B with FCF ~$1.6B in Q1 resulting in LR of 0.9.
See my post from Feb 2024
https://stockhouse.com/companies/bullboard?symbol=t.ac&postid=35907389 AC maintained the 2024 guidance and that means, with midpoint EBITDA of $3.95B, they will still generate about $4.3B FCF. Confirming the ~$2.0B FCF. Read my post below again with reference to FCF.
https://stockhouse.com/companies/bullboard?symbol=t.ac&postid=35946378 Given demand trends are strong and capacity is limited, expect 2025-2026 FCF numbers to be strong as well. AC will be adding efficient capacity in 2025-2026, which will enhance margins (or maintain if cost creeps up or yield falls) in 2026-2027. Few analysts have already started to write about this. Keep in mind, AC is focused on premium customer who is less impacted by economic dynamics.
Q1 results impact Financially AC is becoming stronger and we can see that with S&P upgrade. With LR ~0.9, AC is already the best financially managed airline in North America by a huge margin. Next LR is ~2.5.
At end of Q2, LR will be ~0.75 comparing to the best in the world (e.g. Ryan Air). CFO mentioned that their target LR is 1.5, which is perhaps to accommodate capital expenditure, opex and capital return (to shareholders) in case demand doesn’t pan out as expected. Though, AC LR can stay well below 1.0 even with planned capital spend and shareholder returns. AC should continue to stay prudent with their spend and cash management in order to stay financially healthy. A financially healthy airline can respond to any challenge effectively, allowing the business to expand and employees to grow.
Q2 and onwards Demand: Execs clearly indicated that demand is holding strong and will lead to solid Q2 and Q3 numbers. Some of the cost incurred (e.g. hiring of employees) in Q1 is to prepare for strong Q2 and Q3 delivery leading to strong FCF in 2024.
Cost: Exec mentioned that Q2 fuel is 50% hedged, though most of the Q2 fuel is already purchased (most of the fuel is purchased 6 weeks in advance). Most likely a high %age of Q3 fuel should be hedged too. In any case jet fuel price is staying well below the planned number. Other cost like maintenance can be adjusted Q by Q but overall annual cost will stay within limits (unlike Q1). Employee cost was higher in Q1, most likely bonus (strong 2023 year) and most likely accruing pilots new contract cost.
My numbers from post in Feb 2024 are still holding good.
https://stockhouse.com/companies/bullboard?symbol=t.ac&postid=35890797 Conclusion AC has already achieved financial stability, much better than any North American airline, even better than Delta airlines. Difference in sp is because Delta is already distributing dividends to shareholders and their pilots negotiations were completed last year. Once (soon), AC pilots negotiations are completed and AC start returning capital to shareholders (most likely share buy back as indicated by CFO on the call), sp will cross pre pandemic. This very delay is the reason, AC is the best opportunity in near term.