Air Canada Sees Strong Uptick in Air Travel Demand in the Fourth Quarter

Air Canada AC posted strong top-line growth that exceeded our expectations, capping off a year that saw air travel continue to rebound from pandemic lows. The airline grappled with cost pressures during the quarter, however, resulting in an adjusted loss per share of CAD 0.61, missing FactSet consensus estimates of a CAD 0.26 per share loss. Management also guided for a higher cost per available seat mile than originally expected in 2023 and 2024. Shares tumbled over 8% as a result. Nonetheless, we don’t expect to materially alter our CAD 27 fair value estimate for shares of Air Canada following the firm’s fourth-quarter earnings release, but we will revisit our modeling assumptions when we roll our model forward for the end-of-year filing. We are encouraged by the continued rebound in air travel demand and expect to see profit levels trend upward as the airline navigates through the inflationary environment.

Passenger revenue of $4.1 billion was a fourth-quarter record, surpassing fourth-quarter 2019 levels by 2% despite flying 15% less capacity. A rebound in air travel demand and limited capacity enabled strong pricing gains during the fourth quarter, as yield increased 18% over 2019 levels. Management noted that demand trends were strong across most geographies, with recoveries in domestic and Atlantic routes being most apparent. Passenger revenue from Pacific routes was pressured, however, due to continued softness in China and Hong Kong.

Management provided an optimistic outlook for 2023 as strong early-year booking activity offers enhanced revenue visibility. Management expects available seat miles, or ASM, to increase over 20% in 2023, coming within 10% of 2019 ASM before eclipsing prepandemic levels in 2024. Akin with industry peers, Air Canada plans to add capacity over the next several years to satisfy the strengthening demand environment. We continue to forecast a strong recovery in air travel demand and expect capacity to exceed 2019 levels by 2024.