Air Canada’s Stellar Q3 Results – Even The Analysts Are Impressed

Open Jaw
by Bruce Parkinson

“Great quarter guys.”

It’s getting to be a bit of a refrain on AC quarterly results conference calls. As tough-to-impress investment analysts introduce themselves to ask questions of the AC execs, they can’t help but praise the financial performance of an airline that continues to exceed expectations – including their own.

The 3rd quarter of fiscal 2015 saw Air Canada crush analyst predictions by posting its 6th consecutive record-breaking quarter for EBITDAR – earnings before interest, taxes, depreciation, amortization and rent costs.

Analysts had predicted adjusted earnings per share of $2.20. AC came in at $2.50 per share, a double-digit pleasant surprise.

There were many more impressive statistical indicators in the Q3 results of Canada’s largest airline. Return on invested capital (ROIC) hit 18%, a very attractive number considering AC is projecting 13-15% ROIC for the 2015-2018 period.

AC continues to consistently fill well over 80% of its seats, despite a sputtering Canadian economy and a 10.5% increase in capacity year-over-year. Operating income hit a record $815 million, up 54.9% over the same quarter in 2014.

The big question remains: are these results a flash in the pan caused by low fuel costs or has AC finally found the formula for success? As each positive quarter goes by, the latter becomes more plausible. Investors appear to think so too, as AC stock rose 6.5% yesterday to $11.57 per share following the release of results.

In an article for investment website The Motley Fool, Joseph Solitro says the stock is still significantly undervalued. “At the very least, I think Air Canada’s stock could trade at 5 times earnings, which would place its shares upwards of $17 by the conclusion of fiscal 2016, representing upside of more than 47% from today’s levels,” Solitro wrote.

His summation: “I think Air Canada represents one of the top value plays in the market today.

AC CEO Calin Rovinescu says the results are far from just a lucky bounce due to the slumping cost of oil. “We’re a more resilient, flexible, profitable airline than we ever were. We can withstand whatever headwinds will buffet the market without losing altitude.”

Rovinescu says the company has made “transformative changes” that have positioned it for long-term success. Those changes include:

  • The growth of leisure subsidiary rouge, which, with its lower cost structure, is providing a profitable home for the airline’s older planes as it welcomes more efficient aircraft for its mainline routes. “Rouge is knocking it out of the park,” said Rovinescu. “It’s delivering against all expectations.”
  • Labour peace: AC has negotiated 5 new collective agreements with unionized staff this year, including a recently announced tentative 10 yr. deal with flight attendants.
  • New planes including Boeing 777s and 787s are over 30% more cost-efficient than the ones they are replacing, and “they’re extremely popular with customers,” says Rovinescu.
  • Ancillary revenue per passenger from bag fees and seat selection and preferred seating charges is up 23% year-over-year.
  • The sun market is delivering “better than expected” results, with advance bookings strong and the airline “working very well with Air Canada Vacations product.”

Of some concern for investors is a 3.8% decline in yield, but AC has consistently stated that would happen, as many of its new routes are long-haul and rouge is increasing the percentage of lower-fare leisure customers.

As President, Passenger Airlines Ben Smith put it: “Negative yield is a function of more important things. We’re focused on margins.”

History tells us that things can change quickly in the aviation business, but a confident Rovinescu says he believes he’ll be delivering good news on quarterly results calls for some time to come. “There’s nothing in the past 4 months causing us to change our plans. The results show that the plan in place is the right one for Air Canada.”

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