Air Canada cost-cutting sends stock soaring
Shares up 14 per cent, analysts impressed with airline ‘outperforming expectations’
TORONTO — Air Canada’s efforts to transform its costs appear to be taking off as the country’s largest carrier revised its cost-cutting guidance this week, and several analysts said it was only the beginning of what’s to come.
The country’s largest carrier reported late Thursday a strong September load factor — the average occupancy of seats on its planes — of 86.2 per cent, down slightly from its record month last year at 86.3 per cent. But perhaps more interesting for investors was Air Canada’s revised guidance on costs that came with it.
The company said it now expected its adjusted unit costs, as measured by costs per available seat mile (CASM), to be down three per cent to 3.5 per cent in the third quarter compared to last year, compared with previous guidance of a 1.5- to 2.5-per-cent reduction.
As a result, Air Canada expects its full-year CASM to be down 1.5 per cent to 2.5 per cent, an improvement over previous guidance of a one- to two-per-cent drop.
The airline’s class B shares closed up 56 cents, or about 14 per cent, at $4.49 on the Toronto Stock Exchange, on heavy volume of 10.3 million shares.
Cameron Doerksen, National Bank Financial analyst, raised his price target on the stock to $4.75 a share from $3.75 previously on the news and maintained his “outperform” rating on the stock despite a near 50-per-cent increase in the share price since he upgraded the stock in August.
Doerksen downgraded rival WestJet Airlines to a sector perform Thursday after its load factor slipped and on management’s warning that unit revenue would be under pressure in the final half of the year with the launch of its new low-cost carrier, Encore, its premium economy seats, and its aggressive growth.
But Doerksen said Air Canada wasn’t following the same flight path. While WestJet will be in a holding pattern until early next year, Air Canada was taking off.
“Based on solid traffic results and unit costs that are coming in better than expected, we believe that (third-quarter) results will be very strong and likely ahead of the current market expectations,” Doerksen said in a note to clients. “The company’s cost performance is outperforming expectations.”
He also noted that Air Canada was able to refinance high-interest debt during the quarter, which should afford it additional balancesheet flexibility to help finance new aircraft in the coming years, with a new narrow-body order expected soon and the delivery of its new 787s coming late next year.
The changes underway will have a broader impact than just the third quarter, said Walter Spracklin, RBC Capital Markets analyst, who raised his price target on the stock to $5.50 a share from $4 previously.
Spracklin, who has an outperform rating on the stock, said his primary concern for Air Canada had been that too much capacity would be added to the market with the launch of its low-cost carrier, Rouge, and WestJet’s own Encore. This, in turn, he feared, would drag on prices.
But Spracklin’s tracking of 12,000 random fares suggests that prices are actually up 1.5 per cent yearover-year, which, combined with the strong load factor, has him switching his focus to the significant growth opportunities at the airline and the benefits from its cost-cutting measures.
“We believe Air Canada is in the early stages of a transformational change which will lead to vastly improved operating metrics — and ultimately a step-function increase in profitability,” Spracklin said.
“Despite the strong share-price performance, we believe the early-stage positioning means the shares hold significant value at current levels, as the bias remains significantly to the upside on our estimates and target.”
Fadi Chamoun, BMO Capital Markets analyst, agrees. He raised his price target on the stock to $5 a share from $4 previously and maintained his outperform rating.
“While the stock has risen 35 per cent in the past month, the company is only starting to realize the benefits of its fairly sizable CASM reduction opportunity over the next several years. We believe this would strengthen the company’s competitive position and open up new revenue-growth opportunities, particularly in international market,” he said.