EUR 850.00 For Business Accounts Only

Morningstar | It's Business as Usual as Business Seats Drive Unit Revenue Higher, but We're Maintaining our FVE. See Updated Analyst Note from 17 Feb 2019

Air Canada capped off an upbeat earnings season for major North American airlines with its fourth-quarter results, highlighting positive yield movement exiting 2018 and sending shares over 3% higher, but we’re leaving our $35 fair value estimate and no-moat rating unchanged. Full-year unit revenue growth outstripped our expectations, and we did slightly raise 2019 unit revenue (PRASM) growth on strong booking yields and lower than expected capacity expansion. We now model 5.5% network growth after management confirmed it would not match the 7% capacity expansion posted last year. After a spirited early 2019 recovery, shares now trade in 3-star territory, with the market fully appreciating near-term passenger yield strength and Air Canada’s revenue optimization strategy.

During the quarter, Air Canada benefited from thriving business and premium seat demand, with business cabin revenue rising 12.5% year over year on about 9% capacity growth. Expecting markets will remain lofted going in 2019, after observing strong booking curves, management laid out plans to deepen its Trans-Atlantic presence by launching new routes to Europe from Toronto, Montreal, and Vancouver, with emphasis on beefing up hub to hub traffic. Management attributed its Atlantic success to premium product roll-out and its joint venture with United and Lufthansa.

Air Canada guided to 2% to 3% adjusted CASM (unit costs excluding fuel, Aeroplan, and special items) inflation during the coming year, indicating costs tied to Bill C-49 implementation would weigh on bottom line results. We raised our adjusted CASM forecast for 2019 (above 2%) in accordance with management’s guidance, but broke with management on expectations that fuel costs would finish flattish with 2018. Altogether, we expect a 2% adjusted CASM inflation rate in our model combined with decelerating PRASM growth (1.0% versus 3.8% in 2018) will generate operating margins above 2018 at 9%.

Air Canada’s management team offered fresh details about recently acquired Aeroplan (formerly Aimia) and its integration following the Jan. 10 close. We left our roughly $1.4 billion implied value (after incorporating the $450 million price tag) intact and we expect to update our valuation following management’s late March call where it will explain the program’s accounting. We maintain acquiring Aeroplan allows Air Canada to capitalize on highly favorable loyalty program economics, with operating margins approximating 60%.