Alvin Man
Investment Thesis: Air Canada (OTCQX:ACDVF, TSX:AC:CA) could see further upside from here based on potential revenue growth from a codeshare agreement with Emirates as well as strong passenger demand in the face of rising prices.
In a previous article back in October, I made the argument that while Air Canada has seen an impressive rebound in revenue growth following the COVID-19 pandemic – the company has still been operating at a net loss and investors will want to see a reduction in long-term debt going forward.
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While full-year results for 2022 are yet to be released, we can see that Air Canada stock has slowly been climbing back after seeing a sharp drop in the first half of 2022.
The purpose of this article is to examine revenue growth in greater detail to determine if there is scope for further growth, and also assess the potential trajectory of Air Canada stock in light of upcoming full-year results for 2022.
Performance
When comparing 2019 and 2022 passenger revenue trends across regions, we can see that Canada has yet to reach 2019 levels once again (when taking average revenue from Q1 to Q3 across both years into consideration). As a result, the Atlantic region has yielded the highest average revenue for 2022 from Q1 to Q3, with Q3 in particular showing quite strong performance. Please note that figures for the below tables were calculated using SQL – calculations and original data can be found here.
2019 Results
| Region | Average Revenue for Q1 to Q3 2019 |
| Other | 324 |
| Pacific | 632 |
| U.S. Transborder | 968 |
| Atlantic | 1183 |
| Canada | 1330 |
Source: Average revenue calculated by author using SQL. Original revenue figures sourced from Air Canada Quarterly Reports Q1 to Q3 2019.
2022 Results
| Region | Average Revenue for Q1 to Q3 2022 |
| Pacific | 235 |
| Other | 285 |
| U.S. Transborder | 700 |
| Canada | 1076 |
| Atlantic | 1095 |
Source: Average revenue calculated by author using SQL. Original revenue figures sourced from Air Canada Quarterly Reports Q1 to Q3 2022.
With that being said, it is also notable that the Canadian and U.S. Transborder region have accounted for a higher proportion of overall revenue. When using the average revenue figures for each year – both of these regions accounted for 64% of total average revenue for Q1-Q3 2022, while they accounted for 56% of total average revenue for Q1-Q3 2019.
On the other hand, average revenue for the Pacific region remains significantly below levels seen in 2019.
Looking Forward
As we have seen, the recovery in revenues following the COVID-19 pandemic has been more dependent on the Canadian and U.S. markets.
When comparing with 2019 figures – we can see that average revenue for the Pacific region was significantly higher than in 2022. However, it is possible that Air Canada could manage to bolster revenues across this region once again – particularly with the recent codeshare cooperation announced with Emirates which would allow for connectivity across 46 markets – including the Middle East, Africa, Southeast Asia, and the Indian subcontinent.
Should we see such an arrangement lift revenues across the Pacific region – then this would mark a significant rebound in growth for the company. Moreover, this could also stand to boost revenues across Canada and the U.S. Transborder as the codeshare provides Air Canada with a wider global passenger base.
As mentioned in my previous article, Air Canada has seen an increase in long-term debt relative to total assets since 2019.
| September 2019 | September 2022 | |
| Long-term debt and lease liabilities | 8116 | 15799 |
| Total assets | 27497 | 29754 |
| Long-term debt and lease liabilities to total assets ratio | 0.3 | 0.53 |
Source: Figures sourced from Air Canada Q3 2019 and Q3 2022 Condensed Consolidated Financial Statements and Notes. Figures provided in Canadian dollars in millions (except long-term debt and lease liabilities to total assets ratio). Long-term debt and lease liabilities to total assets ratio calculated by author.
While earnings have remained under pressure and long-term debt has increased significantly since 2019 – the main reason for earnings pressure has been higher fuel prices. However, one positive development is that while Air Canada has had to raise prices to meet such higher costs – this does not seem to have hindered travel appetite among customers, with revenues having seen strong growth in 2022 overall.
As such, I take the view that should we see a continuation of this trend – then earnings should have further room for growth as inflationary pressures on jet fuel prices start to peak. Should we see evidence of this in upcoming earnings results, then this could be a catalyst for upside in the stock.
Conclusion
To conclude, Air Canada has seen a strong rebound in revenue following the COVID-19 pandemic – albeit with average revenue from Q1 to Q3 2022 remaining below that of the same period for 2019.
However, I take the view that Air Canada could see a further boost in revenue with the codeshare cooperation with Emirates, with a wider passenger base not only having the potential to boost Pacific revenues, but also that across Canada and the U.S. Transborder.
Additionally, should we see jet fuel prices start to peak in 2023 – then Air Canada would be in a better position to bolster earnings through continued revenue growth.
Taking these points into consideration, I take a bullish view on Air Canada.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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