Shorts are taking advantage of lack of information on AC strategy due to current pilots negotiations. In reality AC financials are very strong, perhaps the strongest in industry. With LR ~ 0.9, AC leads the pack. AC’s ability to generate FCF is very strong in coming years even in high capex years. See below analysis how AC will generate FCF and how net debt (and LR) will stay well within target and will have spare capital.
Year 2024 2024 is half done and demand is very strong in limited capacity environment. May and June 2024 month traffic was at par with 2019 numbers and AC had few points less capacity than 2019. Q3 tickets are for most part sold and fuel purchased (or hedged). Even if cost has gone up compared to 2023, additional demand in 2024 will bring results closer to 2023 numbers, conservatively. Optimistically, 2024 numbers will match 2023 or higher.
| 2024 | | EBITDA | CFO | Capex* | FCF | Net Debt | LR | Available Capital @ LR = 1.5 |
| $4.0 | $4.3 | $1.8 | $2.1 | $2.6 | $0.6 | $3.5 |
Assumptions Capex*: As per Q1 MD&A. Though the actual capex will be lower as I have explained in my earlier posts. So these numbers are conservative.
FCF: 2023 FCF was $2.75B. Hence, $2.1B is a conservative number because of advance payments to OEMs for 2025/26, thus reducing capex in 2025-2026.
Target LR: AC’s target LR is 1.5. At end of Q2 it will be close to 0.8. It means AC can manage higher than current debt without any issue.
Available capital @ LR = 1.5: AC can use this capital for capex or return to shareholders and still be at target LR = 1.5
Year 2025 – 2027 A very strong 2024 year (FCF and LR), will set a strong base for high capex years (2025-2026). Following are different scenarios, which can pan out:
| 2025 | Scenario | EBITDA | CFO | Capex* | FCF | Net Debt | LR | Available Capital @ LR = 1.5 |
| Extreme | $2.5 | $2.7 | $2.5 | -$0.3 | $2.9 | 1.1 | $0.9 |
| Worst | $3.3 | $3.5 | $2.5 | $0.5 | $2.1 | 0.6 | $2.9 |
| Most likely | $4.3 | $4.6 | $2.5 | $1.6 | $1.0 | 0.2 | $5.5 |
| Optimistic | $4.6 | $4.9 | $2.5 | $1.9 | $0.6 | 0.1 | $6.3 |
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| 2026 | Scenario | EBITDA | CFO | Capex* | FCF | Net Debt | @ LR | Available Capital @ LR = 1.5 |
| Extreme | $3.3 | $3.5 | $4.5 | -$1.5 | $4.4 | 1.3 | $0.6 |
| Worst | $3.6 | $3.8 | $4.5 | -$1.2 | $3.3 | 0.9 | $2.2 |
| Most likely | $4.3 | $4.6 | $4.5 | -$0.4 | $1.4 | 0.3 | $5.1 |
| Optimistic | $4.6 | $4.9 | $4.5 | -$0.1 | $0.7 | 0.2 | $6.2 |
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| 2027 | Scenario | EBITDA | CFO | Capex* | FCF | Net Debt | @ LR | Available Capital @ LR = 1.5 |
| Extreme | $4.0 | $4.3 | $1.7 | $2.1 | $2.3 | 0.6 | $3.8 |
| Worst | $4.3 | $4.6 | $1.7 | $2.4 | $0.9 | 0.2 | $5.6 |
| Most likely | $4.7 | $5.0 | $1.7 | $2.8 | -$1.5 | (0.3) | $8.5 |
| Optimistic | $5.0 | $5.3 | $1.7 | $3.1 | -$2.4 | (0.5) | $9.9 |
The extreme scenario is calculated by an analyst based on observation from 2008 recession (40% reduction in EBITDA). That is highly unlikely because back then, 1. AC had higher capacity than demand going into recession, 2. Had huge pension deficits ($4.2B), 3. Lost $0.8B in incorrect fuel hedges 4. Industry was not set up to manage capacity in response to demand changes 5. AC loyalty plan was held at ransom by Amia. 6. Had inefficient fleet
Today’s AC is in a much stronger position. Hence, in my analysis I have chosen blue & yellow scenarios by year. Capex numbers are from page 21 from MD&A of Q1 2024. Though I firmly believe that the actual capex numbers will be lower than these. If I was to use my estimates for more realistic capex numbers (from earlier post), available capital will be even better.
Below table summarizes the outcome based on different levels of recession. Assumes recession in 2025-26 and full recovery in 27.
| Recession | Net debt | 25-26 FCF | Available Capital @ LR = 1.5 |
| Severe 25/26 | $3.3 | ($0.7) | $2.2 |
| Severe 25/ Moderate 26 | $2.5 | $0.1 | $4.0 |
| Moderate 25/26 | $1.4 | $1.2 | $5.1 |
At rationalized capex numbers (as per my earlier posts, shifting of capex due to limited OEM capacity), available capital will be higher than mentioned above. Sooner or later we will see adjusted capital spend when more information is available. And in 2027, FCF and available capital will increase by a huge step. Even in extreme scenario, AC will have capital available for shareholders. One should keep in mind that in extreme (even in worst) scenario, AC will most likely delay some of the capex, which is normal in industry. This will also boost available capital for 2025-2026 years.
In various scenarios ‘Available Capital @ LR = 1.5’ shows that investors don’t have to be overly concerned. Not saying that all $4.0B should be distributed but there is a very very strong case for share buy backs at such subdued prices. All this does not mean that AC should be laxed in capital allocation. AC needs to continue its focused approach on capital allocation.