Air Canada (TSX: AC) is a leading service provider of scheduled passenger services in the Canadian market, the Canada-U.S. transborder market, and in the international market to and from Canada.

Key Updates:

• Sign of Revival: On April 15, 2022, the company reported that it has carried 1,00,701 customers, which is the highest number of passengers in a single day for the first time since pandemic. This indicates strong customer confidence and a sign of economic revival. However, this is still below the pre-covid average run rate of ~1,50,000 passengers. Notably, during Q1FY22, the company reported a higher passenger load factor of 66.3%, significantly higher than 43.5% in Q1FY21.

• Improved Liquidity: The company reported its quick ratio and a current ratio of 1.23x and 1.26x, respectively, in Q1FY22, which is higher than the industry median of 0.97x and 1.11x, respectively. This indicates that the company has sufficient short-term assets to fund its current liabilities, which is a key positive.

• Cash Flow Turned Positive: In Q1FY22, the company reported its cash from operating activities of CAD 335 million, as compared to a cash used in operating activities of CAD 888 million in pcp. This is a key positive and is likely to support the overall liquidity of the company.

Q1FY22 Financial Highlights:

   Q1FY22 Income Statement Highlights (Source: Company Report)

• In Q1FY22, the company posted its total revenue of CAD 2,573 million, jumped from CAD 729 million in pcp. The growth was primarily driven by increase in Revenue passenger miles (RPMs) of CAD 9,481 million v/s CAD 1,831 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 3,123 million, increased from CAD 1,778 million in pcp, due to higher aircraft fuel costs, increase in wages, salaries & benefits expense coupled with a surge in the regional airlines expense. Operating loss reduced to CAD 550 million, from a loss of CAD 1,049 million in pcp.
• The company reported its net loss of CAD 974 million, which reduced from a net loss of CAD 1,304 million in pcp, supported by lower operating loss as mentioned above, partially offset by a higher interest expense.

Risk associated with the investment:

The company operation is directly linked with the fuel costs, and a surge in international crude oil prices would lead to cost pressure and margin erosion.

Valuation Methodology (Illustrative): EV to Sales Based

Analysis by Kalkine Group

Stock Recommendation:

In the first quarter of FY22, passenger revenues stood at CAD 1,917 million, increased nearly five-fold over pcp. At the system level, capacity increased by 239.5% while traffic increased 417.9%, which resulted into a 22.8% increase in passenger load factor. These factors clearly depict demand revival within the airline industry. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Chorus Aviation Inc, Bombardier Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of AC at the last traded price of CAD 22.99 on May 04, 2022.

One-Year Technical Price Chart (as on May 04, 2022). Source: Kalkine, Analysis by Kalkine Group

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

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