Post by
Tempo1 on Oct 03, 2024 9:20am
RBC : Q3 preview
Note by Tempo1: Some dislike the RBC analysis but it is one of the most detailed and based on multiple precursor indicators (as NBF too). Anyway, for more than a year they are right on the SP and to date many analysts lowered their targets in the 18$-22$ range (including former fans like TD and NBF).
Q3 estimate revisions
AC: Q3 estimate lower and below consensus; price target unchanged at $17; maintain Sector Perform rating. We are decreasing our Q3/24 EBITDA estimate to $1,275MM (from $1,422MM), below consensus of $1,319 MM on lost bookings, higher one-time costs related to the pilot deal, and lower fares from discounting witnessed post the pilot agreement. Our lowered 2024 EBITDA estimate of $3,115MM (from $3,256MM) is below consensus of $3,203MM and at the low end of guidance of $3.1B to $3.4B. Our 2025 estimate moves to $3,113MM (from $3,384MM), which represents the street low (cons. $3,519MM) given our view yields will remain pressured into next year on a weaker consumer and increased industry capacity. Our target multiple moves to 3.1x (from 3.4x) resulting in our unchanged target price of $17.
Airfares continue to see pressure from discounting and weaker consumer spending. We note continued negative price growth in the past quarter across the data we track, consistent with promotional discounting noted late in the quarter across carriers. Canadian airfare CPI saw a decline in of -2.7% y/y in July, down from +2.2% last quarter. Similarly, data from our proprietary Canadian Airfare Index indicates a similar directional trend, with prices down -4.6% y/y in Q3. We also incorporate RBC’s Vacation Price Index, which tracks the changing cost of travel and which is down -0.7% y/y in Q3. Overall, we expect further price normalization during the remainder of 2024, given our view that higher interest rates will continue to weigh on discretionary spending and increasing capacity will result in lower fares. Moreover, we note similar read-throughs from peers such as Transat that highlighted downward pressure on yields (down -9.7%) due to intensified competition and overcapacity throughout the industry as well as consumers who are increasingly price-conscious given the economic climate.
Leading indicators generally weaker with some variability across carriers. We track travel search interest changes y/y as measured by website traffic across mainline and non-mainline carriers. We flag that overall Canadian travel search interest declined -0.3% in Q3. AC search interest was down -7.2% vs WestJet +25%, which we attribute to booking away related to potential disruptions from the pilot strike and higher traffic for WestJet from the Sunwing merger. Interestingly, Canadian non-mainline search interest was flat in Q3 at 0.1%, versus being consistently positive since 2022, which may indicate lower demand across fare types and booking hesitancy given recent closures of start-ups. Additionally, we look to RBC's proprietary Get Out and Travel (GOAT) index to gauge consumer travel demand. The Canadian GOAT index was down -1.3% y/y through Q3 and has been consistently negative since midJune 2023.
Non-mainline competition steady, even with closures. Total non-mainline fleet (Flair, Transat, and Porter) as percentage of the total fleet (including AC and WJA) increased in Q3 to 19.4% from 19.1% last quarter. We saw both Canadian Jetlines and Lynx fold this year, however the percentage of flights from non-mainline operators (restated to include Transat) reached a high of 18.5% of total flights, mainly due to route expansions at Porter offsetting any losses at smaller start-ups (Exhibit 5). While we see mainline operators ultimately gaining from the rationalization of the competitive landscape, we note Porter continues to expand route offerings, becoming a notable third option for air travel among Canadians.