Earnings Call: Air Canada Delivers Strong Q3 Report with Revenue Growth

image

Earnings Call: Air Canada Delivers Strong Q3 Report with Revenue Growth

Air Canada (AC.TO) reported its third-quarter results on November 5, 2024, showing $6.1 billion in operating revenue and $1.5 billion in adjusted EBITDA (24.9% margin). The airline’s adjusted earnings per share (EPS) of $2.57 surpassed market expectations. This performance comes with a positive outlook for future growth alongside the implementation of a new share repurchase program and some cost pressures.

Key Points:

  • Air Canada’s operating revenue reached $6.1 billion, with adjusted EBITDA at $1.5 billion.
  • Adjusted EPS was reported at $2.57, exceeding market forecasts.
  • A significant four-year new agreement was signed with pilots without major disruptions.
  • On-time performance improved, and cargo revenues rose by 18% to $253 million.
  • Despite a 4% decline in passenger revenues, demand remained strong in domestic and U.S. transborder markets.
  • The company plans to increase capacity by 5% in 2024 and forecasts approximately $3.5 billion in adjusted EBITDA.
  • A new share repurchase program allowing for the repurchase of up to 10% of publicly traded shares will be initiated.
  • Air Canada anticipates stable demand and mid-single-digit capacity growth in 2025, with a focus on cost discipline.

Company Outlook:

  • Air Canada projects a 5% capacity increase for 2024 and stable demand with mid-single-digit capacity growth for 2025.
  • The company targets zero or positive free cash flow in 2025 despite cost pressures from regulatory changes and higher infrastructure fees.
  • Management is prepared for labor negotiations with cabin crew and expects a quicker resolution compared to pilot negotiations.

Negative Highlights:

  • Passenger revenues decreased by 4%, while operating expenses rose by 3% mainly due to capacity increases.
  • Fuel costs increased by 1%, and unit cost pressures are expected to rise.
  • The company anticipates a significant one-time charge of approximately $500 million for pension prior service costs in the fourth quarter.

Positive Highlights:

  • Demand remains strong in key markets, and cargo revenue, particularly in Asia Pacific and India, is increasing.
  • The company is optimistic about transatlantic RASM trends for the fourth quarter and 2025, with early indicators pointing to a recovery.
  • Air Canada is well-positioned for a high CapEx cycle with a strong balance sheet and an approximately 1x leverage ratio.

Shortcomings:

  • In the Atlantic, there was a slight demand weakness attributed to increased capacity.
  • Corporate travel is improving, but faced challenges due to workforce uncertainties in the fall.

Q&A Highlights:

  • Executives discussed the delivery schedule for new aircraft, including 787s and 321XLRs, that are not expected to significantly impact financials.
  • They also addressed the sequential $100 million increase in the maintenance fund due to contractual adjustments.
  • The management team will provide further details on strategies during the Investor Day on December 17, 2023.

Air Canada’s third-quarter performance reflects the airline's resilience and strategic planning in a complex operational environment. With a strong balance sheet and a clear growth plan, the company appears ready to navigate market challenges and capitalize on the recovery in travel demand.