Morningstar | Air Canada Improves Guidance at Investor Day, but We Maintained our FVE
On the heels of Air Canada’s investor day, we chose to maintain our CAD 35 fair value estimate. We were encouraged by management’s new guidance that included annual increases to its EBITDA margin, return on invested capital, and cumulative free cash flow for the 2019 to 2021 period. Notably, Air Canada expects to achieve EBITDA margins, excluding special items, between 19% and 22% (formerly 17% and 20%) on the back of continued improvements in route optimization and fleet transformation. We agree that substituting costlier A319s and E190s with new A220s and 737 MAX jets will lower costs and open new route connections, but we also believe a slowing air travel market will offset the carrier’s fleet initiatives. EBITDA margins climax at about 19% through 2021 in our model, before declining slightly as demand (revenue passenger miles) declines four percentage points versus 2018.Management held its adjusted CASM (costs per available seat mile excluding fuel and special items) inflation expectations of 2% to 3% and expanded on plans to register CAD 250 million in cost savings through the end of the year. We concur with management’s assessment, as new narrowbody aircraft generated CASM savings over 10% versus outgoing aircraft, and the carrier marked savings of about CAD 200 million last year. Densification and upgauging will expand margins in 2019, but we also assume lower fuel costs will buttress material savings. We anticipate lower fuel costs per liter will offset higher consumption from fleet expansion, leaving total fuel costs roughly in line with 2018.
We remain impressed with Air Canada’s effort to close the gap with U.S. legacy peers,and we find value in its sixth freedom expansion and recommissioned loyalty program. Both initiatives drive revenue premiums for U.S. legacy carriers; however, our cautious air travel outlook restrains the upside to Air Canada’s revenue and cost initiatives. Shares are fairly valued at our CAD 35 fair value.
Air Canada is a domestic and international airline Company. Co. is engaged in the provision of scheduled passenger services in the Canadian market, the Canada-United States transborder market and in the international market to and from Canada. Through its subsidiaries, Co. also operates in low-cost carriers segment, providing service to customers in lower density markets and also in higher density markets at off-peak times throughout Canada and the United States. Co. also provides air cargo services on domestic and the U.S. transborder flights; tour operator services which operate in the outgoing leisure travel market; and ground handling services.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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