Star-Studded Canadian Stocks Tour：Is Air Canada undervalued?

In terms of revenue, Air Canada's Q1 performance was actually in line with expectations: total Q1 revenue was $5.2 billion, up 7% year-on-year. Among them, passenger revenue increased 9% year-on-year, cargo revenue decreased 9%, and other revenue increased by 1%, basically remaining unchanged. The revenue per passenger fell by 2.2%, mainly due to business decline in the Atlantic market and a drop in passenger load factor. Air Canada stated that this was mainly due to a weakened interest in travel among Canadians after the pandemic, and "pent-up demand and 'revenge travel' are slowing down over time."

In terms of regional breakdown, the Pacific region saw the strongest revenue growth. For Air Canada, Pacific business refers to routes between Canada and Asian countries such as China, Japan, and South Korea. As the importance of the Asian market to Canadian tourism and trade continues to grow, Pacific routes have become an important part of Air Canada's international strategy. In addition, the expansion of Atlantic routes has been hindered by political issues on the Middle East, and the company has deployed some capacity from the Atlantic region to the Pacific market. As a result, Pacific capacity increased by 38.3% year-on-year, and this adjustment led to a 2.5% increase in domestic capacity and a 2.8% increase in revenue per passenger; cross-border capacity increased by 6.4% and revenue per passenger increased by 7.5%. Therefore, it can be seen that Air Canada is consciously carrying out strategic deployment and adjustments, and these adjustments have already shown results on the revenue side.

However, in Q1 2024, Air Canada still suffered a loss of CAD 81 million, with a loss per share of CAD 0.27, which is the main reason for the significant decline in its stock price. The main reason for this phenomenon is a 10.29% increase in costs, with the largest increase in management expenses, which increased by 27.40% year-on-year. This is related to the company's development strategy, including flight increases, wage increases, and digital transformation, which will increase maintenance costs and employee wage expenditures while increasing passenger volume. Therefore, overall, the cost increase in Q1 belongs to a necessary step in the company's summer capacity expansion plan.

According to the company's recent conference call, it is expected that the capacity in 2024 will increase significantly, by 6%-8%. Adjusted CASM (Cost per Available Seat Mile) will increase by 2.5%-4.5%, mainly due to the relatively low growth in capacity compared to last year, while costs continue to rise. The company expects adjusted EBITDA to be between CAD 3.7 billion and CAD 4.2 billion, which is basically unchanged from last year. The management stated that the profit growth target for the whole year of 2024 is to maintain basic parity with the previous period.

Although the full-year guidance for 2024 seems somewhat flat, it cannot be denied that this is largely due to the current industry situation: airline costs remain high, while global aviation operations are declining.

In terms of fleet and liquidity, as of the end of Q1 2024, Air Canada's free cash flow was approximately CAD 10 billion, including CAD 8.7 billion in cash and investments and CAD 1.32 billion in untapped credit lines. The company plans to net-add five aircraft this year, including one Boeing 787-9, two Airbus A330-300s, two Airbus A220-300s, and dispose of two A319s. At the same time, AC is also arranging additional MAX 8 aircraft leasing agreements, planning to be delivered in 2024 and put into use in 2025.

However, it is worth noting that Air Canada has been deleveraging its company since last year, with net debt decreasing by nearly CAD 3 billion, and Q1 debt decreasing by CAD 786 million. Currently, its debt is only half of the level at the end of 2022, and its net leverage ratio has dropped from 5.1x in 2022 to 0.9x, indicating that the company's deleveraging process is progressing according to plan.

In summary, as analyzed above, the biggest problem for Air Canada lies in the reduction of free cash flow during its expansion process. In terms of cash flow guidance, the company even gave the most pessimistic expectation that it may be negative until 2026. However, the company's stock price is currently relatively low compared to its peers, and its fundamentals are running well without major problems. Coupled with the upcoming summer peak season, the company's stock price still has some room for growth.