Air Canada top bet of North American airlines
Stock rated high among analysts, but investor enthusiasm slowing
Air Canada’s turnaround plan has won over analysts. But the airline has yet to get investors on board.
The stock boasts the highest rating among North American airlines, according to data compiled by Bloomberg, and analysts are projecting a 48 per cent rally in the next 12 months. That’s the best return among the 10 biggest carriers in the region.
Investors are showing less enthusiasm. Air Canada’s 1.3 per cent gain this year through Monday trails Canada’s benchmark stock index, signalling the big run-up may be over after a quintupling in the company’s shares since chief executive officer Calin Rovinescu announced a cost-cutting strategy in June 2013.
“There’s still room for the stock to rise, but a good chunk of the journey has been done,” Marc-André Robitaille, who holds Air Canada stock among the $800 million he oversees at AGF Investments Inc. in Montreal, said in a telephone interview. “The easy money has been made.”
Rovinescu is working toward a goal of cutting operating expenses, as measured by the cost to fly each seat a mile, by as much as 15 per cent through 2018. He’s packing more seats on long-haul aircraft, expanding the low-cost Rouge leisure unit and ordering new fuelefficient jets such as Boeing Co.’s 787 Dreamliner.
The airline is set to release firstquarter results on May 12. Earnings will be 16 Canadian cents a share, based on the average of 14 analysts’ estimates compiled by Bloomberg, which would be the first profit to start the year — the slowest travel period for North American airlines — since Air Canada’s November 2006 public offering.
Investors may get their next glimpse of Air Canada’s longerterm outlook at a presentation to investors in Toronto on June 2. Rovinescu unveiled his five-year operating expense and cost goals at the last investor day two years ago.
“The shares have had a tremendous recovery in the last couple of years, but now we’re at a point where people are looking for the next leg of growth and how we move higher from here,” Chris Murray, an AltaCorp Capital analyst in Toronto, said in a telephone interview.
Air Canada doesn’t comment on analyst reports or the future direction of the company’s share price, Peter Fitzpatrick, a spokesman, said on Monday.
Investors are willing to pay about 3.5 times Montreal-based Air Canada’s expected earnings per share for the stock, according to data compiled by Bloomberg. That’s less than half the average priceearnings ratio of 8.8 of its peers. It also trails the 8.1 ratio of smaller Calgary-based rival WestJet Airlines Ltd., which has been ratcheting up competition at home by adding short-haul routes through its Encore unit.
Air Canada plans to increase capacity nine per cent to 10 per cent this year, with much of the growth coming at Rouge, which serves leisure destinations in North America, Europe and the Caribbean. The unit, begun in 2013 with four planes, flew 28 aircraft at the end of December — with a target of 36 by the end of 2015.
Rouge’s Boeing 767 and Airbus Group NV A319 jets — which have been fitted with additional seats — cost up to 29 per cent less to operate than comparable aircraft on the company’s main line, according to Air Canada. Rouge employees earn less than their colleagues at the main line because they were hired in the last three years and don’t have as much seniority.
Fuel costs, which represent about 30 per cent of all expenses, are another target of the CEO. The new Dreamliners will have 29 per cent lower fuel and maintenance expenses than the Boeing 767s they replace, Air Canada has said.
Further savings will result from Air Canada’s decision to shrink its fleet of Embraer SA E190s by 20 aircraft and replace them with five Airbus narrow-body jets and five Boeing 767s. The switch will cut operating costs by 10 per cent, according to the airline. Earnings before interest, taxes, depreciation and aircraft rent will climb by about $500 million between 2014 and 2016 as a result of these moves, according to David Tyerman, a Canaccord Genuity Inc. analyst in Toronto.
Air Canada is also renegotiating a deal with partner Chorus Aviation Inc., the operator of several short-haul flights for the company, which will result in benefits of $550 million from 2015 to 2020. Of that total, $50 million will materialize this year, the company said in announcing the deal in February.
“The fundamental changes they’ve made are starting to bear fruit,” Murray said.
For all of Rovinescu’s efforts, Air Canada still remains the second least-efficient airline in North America. Costs for each seat for a mile, a key measure of airline profitability, were 15.1 cents in the fourth quarter, 13th among 14 North American airlines tracked by Bloomberg. That compares with a 12.4-cent average for the 14 airliners included in the group, and WestJet’s 11.8 cents. Delta Air Lines Inc. fared worst at 17.7 cents.