Air Canada T.AC

CIBC: Fireside chat with AC.

[Tempo1]

Optimistic On 2025 – Eastern Conference Key Takeaways

We had the pleasure of hosting AC at CIBC’s 23rd Annual Eastern Institutional Investor Conference. With us from the company were John Di Bert, Executive Vice-President & CFO, and Valerie Durand, Head of Investor Relations and Corporate Sustainability. Below are our key takeaways from our fireside chat with AC.

Pilot Union Agreement Update: AC reached a tentative agreement with the Air Line Pilots Association (ALPA) on September 14. The ratification vote opens on October 1 and closes on October 10. While AC noted that September bookings heading into a potential labour disruption did show some bumpiness, the booking curve was pretty stable in July and August. In addition, given the strike was avoided and there were no flight cancellations, we believe the impact on revenue is not as bad as feared. The situation remains fluid but customers who may have changed their flight plans due to the strike are able to reschedule. We expect more colour on the impact of the strike threat when the company reports Q3 results. However, simplistically, we estimate that AC averages ~$63MM in revenue per day in H2/24E. If we assume the impact of the strike on the booking curve was contained to about a four-week period, that would suggest about $1.8B in revenue was impacted in total. Assuming 25% of that revenue is affected by both lower load factors and yields translates to a ~$440MM impact to revenue. Nonetheless, we think the market looks through this issue.

Update On Demand Trends Across The Network: AC provided an update on supply/demand trends across its network. In Domestic, it remains competitive but AC has looked to match supply with demand. And while there has been an increase in capacity from ULCCs, AC’s network reach, loyalty program, and frequency do create a moat. As such, yields in H1/24 were up 3.5% Y/Y, which we would argue is better than expected at the start of 2024. In the Transatlantic market, we are seeing a similar trend. AC has been rational in how it is adding capacity (focusing on secondary markets that help drive its Sixth Freedom traffic, for example). Similarly, despite the growth in transborder traffic from ULCCs, AC’s Transborder yields were up 1.0% Y/Y in H1/24. AC is growing Transatlantic in the low-single-digit % range, which is arguably below what it originally targeted. That being said, the airline also noted it is seeing capacity stabilize over the Atlantic in Q4. From that perspective, recall that TRZ revised its capacity growth plans for F2024 from up 19% to up 11%-13% to sub-10% recently. Lastly, the Pacific remains a recovering market but yields remain healthy and demand continues to recover. AC did note that prior to the pandemic it was flying to China ~35 times per week vs. approximately half a dozen times now. This situation has been offset by strength into Japan and South Korea to which AC offers direct flights. Overall, demand trends remain healthy and the areas in which AC has seen yield pressure have been related to excess capacity. From that perspective, we are more optimistic on supply/demand trends in 2025. We foresee a more rational capacity growth situation next year, with TRZ indicating it will have more moderate growth. This is supportive of yields

Corporate Travel Demand Trends: AC noted that corporate travel has recovered to 60%-70% of pre-pandemic levels. The airline did note that it has an opportunity to drive continued improvement here by adjusting its network (i.e., increasing frequency on certain routes). AC continues to point to premium revenues tracking well along with leisure travel as offsetting the delayed recovery in corporate travel relative to pre-pandemic levels.

Fleet Expansion Discussion: AC has 18 787s scheduled for delivery in 2026 and 2027 vs. the original schedule that these aircraft would primarily enter the fleet in 2026. This circumstance creates greater balance and smooths out capex somewhat. AC did note that it has had to assess its fleet growth plans earlier given delivery delays from the OEMs. That being said, AC does move past its peak capex in the next couple of years and that should result in a reacceleration in its FCF generation.

Capital-allocation Plan: Following the pandemic, AC has allocated a significant amount of cash flow towards debt reduction, with leverage currently around a 1x multiple. While the company is entering a capex cycle consisting of both growth and replacement, AC noted the significant amount of equity within its fleet and room on its balance sheet. AC’s strong balance sheet also positions the company to implement a shareholder return program, which we think could happen in 2025. We view that as a positive near- to medium-term catalyst.

[3cap]

AC’s strong balance sheet also positions the company to implement a shareholder return program, which we think could happen in 2025. We view that as a positive near- to medium-term catalyst. That will make it more expensive to short AC coming very soon!

[Nordico]

Word. If the SP is still somehow sub-$20 in Q1 2025, then I'd like to see a buyback program. Otherwise would be happy with a dividend.