English: Air Canada Centre, Air Canada headquarters, and Air Canada Boeing 777-333ER – Montreal, Quebec. It is nicknamed “La Rondelle” (“The Puck”). Français : Centre Air Canada, le siège social d’Air Canada, et un Boeing 777-333ER d’Air Canada à Montréal. Centre Air Canada a le surnom “La Rondelle.” (Photo credit: Wikipedia)
AC.B : TSX : C$2.28
AC.A : TSX
BUY
Target: C$5.50
COMPANY DESCRIPTION:
Air Canada, together with Jazz, operates an average of 1,370 scheduled flights each day and carries over 33 million passengers. Air Canada, together with Jazz, provided direct passenger service to 158 destinations and, through commercial agreements with other unaffiliated regional airlines, to an additional 14 destinations, for a total of 172 direct destinations on five continents. Air Canada trades on the TSX under the symbols AC.A and AC.B.
All amounts in C$ unless otherwise noted.
Transportation and Industrials — Airlines and Aerospace
INVESTOR DAY: SIGNIFICANT UPSIDE POTENTIAL BUT HIGH RISK
BUY Air Canada (AC) shares for profit growth potential We continue recommend BUYing AC shares given substantial potential upside from new initiatives including new B777s, new B787s -supplemented by cost initiatives.
Surprisingly strong capacity growth for 2014
AC guided to capacity growth of 9-10% for 2014, based on considerably more international flying. It suggests significant market share gains for AC
from its new B777 and rouge initiatives. Potential very large upside on cost side AC is targeting a 15% reduction in CASM excluding fuel and Air Canada Vacations land cost (adj. CASM) over the mid term from its initiatives from increased international flying and lower costs. We estimate this could generate more than $1.4 billion of EBIT.
Likely offset on unit revenue side A significant chunk of the CASM gains is expected to come from more long-haul flying, which has inherently lower RASM. We estimate the RASM reduction could be in the $400-500 million range.
Potential large net gain is highly uncertain Our rough calculations suggest a very large upside potential. However, the estimates assume success on initiatives, some of which are quite uncertain (e.g., rouge), and the upside from others could be offset by competitive actions. Accordingly, there is a high degree of risk to our forecast.
Forecast increased to reflect potential upside
We have increased our forecast on the CASM and capacity guidance. There may be material upside potential from AC’s initiatives. Our unchanged valuation multiple of 5.0x EV/EBITDAR is a relatively normal multiple for the sector.
Forecast
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