FromThe Globe and mail
Citi analyst Stephen Trent thinks Air Canada (AC-T -1.38% decrease) “looks well positioned to getting back to making money” following the ratification of a labour agreement with its pilots and “excess competing capacity seems to be exiting the Canadian aviation market” with the bankruptcy announcement from Canada Jetlines Operations Ltd.
In a research note titled The Stars Seem To Be Aligning For Higher Valuation Altitudes, Mr. Trent also thinks “potentially lower interest rates might at least provide some valuation support.”
“Citi estimates that Air Canada’s disagreement with its pilots resulted in $400-milllion in lost 2H’24E revenue, as the carrier had preemptively cancelled some flights, while some of its customers probably rebooked their trips with other airlines,” he said. “However, following last month’s tentative agreement, Air Canada’s rank-and-file pilots subsequently ratified this agreement this past week, with 67 per cent voting in favor of the contract that would apparently add $1.9-billion in value for its members, through its September 2027 expiration. We estimate that this agreement adds 1.5 points-worth of ex-fuel CASM [cost per available seat mile] growth next year.”
“Forecast adjustments for Air Canada include the incorporation of (A) reduced ‘24E/’25E available seat mile or ASM growth, (B) higher, ‘25E passenger yield growth and (C) higher, pilots’ agreement-driven, ex-fuel cost per available seat mile or CASM, ex-fuel into our model. (Passenger yield, the airline industry’s price point, measures the amount of ticket revenue per passenger mile flown). Although Citi’s 2025E EPS for Air Canada declines slightly, we increase our ‘25E P/E target multiple from 7 to 8 times, which considers what would likely have been even stronger earnings growth, had it not been for the carrier’s recent dispute with its pilots.”
Reiterating a “buy” rating for Air Canada shares, the analyst raised his target by $1 to $21. The current average is $22.27.
“We rate Air Canada Buy, which is based on strong global potential for a continued recovery in international long-haul passenger revenue, and what looks to be a stock price dip,” he said. “Although the carrier’s margins seem unlikely to catch those of several of its southern peers, this carrier has the most international long-haul exposure among Citi’s Americas Airline coverage.”
Elsewhere, Scotia Capital’s Konark Gupta raised his Air Canada target to $24 from $22 with a “sector outperform” rating.
“We are growing more bullish on AC after its pilots ratified a new four-year contract that expires on September 29, 2027,” he said. “The contract appears to be costlier than we had anticipated, slightly weighing on our margin outlook, but the silver lining is that a strike was averted and now management can focus on strategic priorities to create shareholder value. Although the stock has already bounced off the lows as the tentative deal was announced on September 15, we believe the valuation multiple, which remains compressed vs. history and U.S. comps, is due for further re-rating as AC potentially updates its long-term plans over the next few quarters. We may have to tweak our model based on such plans, however, today we are making necessary adjustments to reflect: (1) RASM [revenue per available seat mile] impact from labour risk between late August and early October, (2) CASM impact of the pilot contract, and (3) the recent pullback in jet fuel prices. Our target increases to $24 (was $22), driven by a modest expansion in our multiple to 3.7 times (was 3.5 times) and valuation roll-forward to 2026 (was mid-2026) as our 2025-2026 EBITDA estimates are broadly intact while our net debt estimates have increased slightly. "