Post by
Tempo1 on Oct 14, 2024 4:41pm
CIBC: Optimistic On AC Heading Into 2025
Why We Are Optimistic On AC Heading Into 2025 -- Transportation & Aerospace Weekly
Key Points
AC and the Air Line Pilot Association (ALPA) announced a tentative agreement on September 15, thus avoiding a potential work stoppage. This past week, ALPA announced the deal was ratified. A frequent reaction we have seen is surprise that AC shares have not responded more positively (AC is up 8% since September 14). We do view the ratification of the ALPA agreement as a de-risking event, but what keeps us optimistic on AC heading into 2025 is the moderation in capacity growth we are seeing in the Canadian airline sector. As we noted in our Q3/24 Industrial/Transportation Preview (link to note), we expect growth to be more modest next year, especially on routes that experienced excess capacity (Atlantic, sun markets). This should result in a more constructive yield environment.
Looking at the Canadian aviation landscape, we have had a couple of ULCCs exit the marketplace this year (Canada Jetlines, Lynx). Looking at other Canadian carriers, which have been more aggressive in their growth plans in recent years, we notice a similar trend. According to RadarBox data, on a rolling one-month average, Flair's flight activity has been down ~10%+ Y/Y in September/October versus down low- to mid-single-digit percentage during the summer. For TRZ, its flight activity was up 20%+ Y/Y to start 2024 but has steadily declined through the year and is now down mid-single-digit percentage over the past couple of months. We expect TRZ's F2025 growth to be much more modest versus what its plans were in F2024. Porter remains in a growth phase but this has moderated to up 45%-50% Y/Y in October versus up sometimes over 70% Y/Y during the summer. We would also note that thus far, Porter’s average daily flights in October are down 8% versus Q3/24. This compares to 2023 when Q4/23 average daily flight activity was up 10% Q/Q, and also underperforms the seasonality we saw in 2019 when Q4/19 average flight activity was down 5% Q/Q.
We note that Canada has been a laggard to the U.S. through this postpandemic recovery. The U.S. was the first to open up and the first to experience the normalization of travel demand (i.e., end of revenge travel). U.S. airlines have been adjusting their capacity lower, and we have seen this benefit the U.S. airline equities (XAL Airline Index up 26% since August 5). Looking at the XAL Index versus the Y/Y percentage change in U.S. airline flight activity, during the spring and summer when the growth rate was higher, U.S. airline equities posted negative monthly returns. As capacity growth moderated in August from up mid-single-digit percentage Y/Y growth to lowsingle-digit percentage Y/Y growth, we saw the XAL Index post positive monthly returns. This again highlights that moderating capacity growth is a positive for airline equity sentiment and performance, which bodes well for AC.
While AC’s H2/24 results will reflect the impact of a potential pilot strike, we would argue that investors should look through this and instead focus on the improving equilibrium between demand and supply, as well as AC’s discounted valuation