Air Canada (TSX: AC) is Canada's largest airline, generally serving nearly 50 million passengers each year together with its regional partners. It is a sixth freedom airline, similar to Gulf carriers, which flies many U.S. nationals on long-haul trips with a layover in Canada.

Key highlights 

Improved Operational metrics: In Q3FY21, the company posted improved operating performance and reported its Revenue passenger miles (RPM) of 7,915 million, which increased from 2,517 million in pcp. A higher RPM denotes higher traffic and is a healthy sign. Moreover, Passenger load factor improved to 71.2%, from 42.3% in pcp. The above indicates improved operational performance.

Leveraging E-commerce business: Air Canada Cargo is a global cargo service provider and a division of Air Canada. In 2021, the company plans to generate additional cargo revenue from the e-commerce business and by converting many of its Boeing 767 aircraft into specialized freighters to capitalize the growth of e-commerce which would be a significant positive. Cargo revenues in Q3 2021 totaled CAD 366 million, up CAD 150 million or 69.4% from Q3 2020.

Strong cash flows: The company generated higher net cash flows from operating activities in the reported period, totaling CAD 269 million, up CAD 555 million from the same quarter in 2020. Strong advance ticket sales and a large increase in passengers carried resulted in higher cash flows.

Ample liquidity: At the end of Q3 2021, the company reported its consolidated liquidity of CAD 14.4 billion which includes CAD 9.5 billion in cash and cash equivalents, short-term and long-term investments, and CAD 4.9 billion were available under undrawn credit facilities. Considering the capital-intensive nature of the business, a higher liquidity is preferable for break free operations.

Risks associated with investment 

The company's operations are irrevocably linked to the number of passengers and the cost of fuel. However, aircraft fuel stood at CAD 472 million in Q3FY21, a significant increase from CAD 175 million in pcp. If the current trend continues, the company's margins and cash flows are expected to suffer. 

Financial overview of Q3 2021

Source: Company Filling 

• In Q3 2021, the company posted its total revenue of CAD 2,103 million, jumped from CAD 757 million in pcp. The growth was primarily driven by increase in the passenger revenue (CAD 1,636 million v/s CAD 507 million in pcp) due to better operating environment in the North American market as Canadian provinces and along with several US territories gradually rolled out reopening plans.
• Total operating expenses stood at CAD 2,467 million, increased from CAD 1,542 million in pcp, due to higher aircraft fuel costs, increase in wages and salaries along with a jump in regional airlines expense. However, its operating loss reduced to CAD 364 million, from a loss of CAD 785 million in pcp.
• The company reported lower net loss of CAD 640 million, compared to a net loss of CAD 685 million in pcp.
  

Valuation Methodology (Illustrative): EV to Sales Based

Analysis by Kalkine Group 

Stock recommendation

Positive revenue and traffic trends in the third quarter encouraged the company, with strong increases in key passenger geographic segments, a record cargo performance, and significant improvements in both Air Canada Vacations and Aeroplan. In Q3 2021, the combination of these factors, along with effective cost controls, resulted in net cash flow of CAD153 million, which was significantly higher than Q3 2020. The company is also concentrating on the e-commerce market, where it anticipates strong freight revenue. It also completed a series of financing transactions that allowed the company to lower its borrowing costs, extend the maturities of corporate debt, and raise gross proceeds of approximately CAD 7.1 billion. As a result, Air Canada's balance sheet had around CAD 9.5 billion in available liquidity at the end of the third quarter of 2021. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of AC at the last traded price of CAD 22.85 on January 14, 2022.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

 Technical Analysis Summary

One-Year Technical Price Chart (as on January 14, 2022). Source: Kalkine, Analysis by Kalkine Group 

*The reference data in this report has been partly sourced from REFINITIV.

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