Air Canada Earnings: Hot Summer Quarter Doesn’t Buck the Long-Term Cost Growth Trend

With no-moat Air Canada’s AC third-quarter financial results and revised 2023 expectations in hand, we have lowered our fair value estimate to CAD 15 from CAD 18.

Air Canada continues to rebuild capacity and refine its network as postpandemic travel restrictions have ceased and demand for air travel has bounced back to approach pre-COVID-19 levels, surpassing it in some markets. Fueled primarily by strong international travel, Air Canada’s rebound has nonetheless been more gradual than other major North American airlines—it now expects passenger miles flown in 2023 to approach 90% of their 2019 total while other large north American carriers already have or will soon lap their 2019 capacity in 2023.

Strong demand and some lingering constraints on supply meant record revenue for Air Canada, with third-quarter operating revenue surpassing 2019′s by 14%. As with many of its peers, though, we also observed growth in Air Canada’s recurring unit operating costs, which we expect to mar the airline’s profitability in the coming years. Management’s expectations of unit costs for 2023 have grown almost a cent throughout the year. Looking forward, as supply constraints alleviate and travel demand likely resumes more historic patterns, we expect the airline’s record yields (revenue per mile) to float downward to historic norms, closer to 19 cents as they were in 2015-19 from the 25 cents Air Canada saw in the latest bustling quarter. This reduction of profitability affects our forecast somewhat dramatically, accounting for the CAD 3 reduction in fair value estimate.