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.
summation: “I think Air Canada represents one of the top value plays in the
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:
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.”
peace: AC has negotiated 5 new collective agreements with unionized staff this
year, including a recently announced tentative 10 yr. deal with flight
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
revenue per passenger from bag fees and seat selection and preferred seating
charges is up 23% year-over-year.
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.”